Monday, October 16, 2006

College Savings Report Card: "D" for Denial

College financial aid pros give parents poor grades for college prep. Bad cases of denials are causing more families to lag behind in college savings, according to a new poll of college financial aid administrators from AllianceBernstein Investments.

How bad is it? About 50 percent of families spend more on summer vacations than college savings accounts, according to the survey, which includes a poll of 1,358 parents.

Keep in mind that the survey was commissioned by a financial service company, which may benefit if parents are spooked about a perceived lack of financial planning. But nevertheless, the survey includes some thoughtful insights about the role of denial and long-term planning. We all have our bouts of denial and this survey was a wake-up call for me.

Here's a short summary:

Parents have high hopes for financial aid:

· 87% of parents believe scholarships and/or grants will cover a portion of their children's undergraduate education expenses;
· 72% think their children are likely to have "special or unique" talents deserving of scholarships.

But, according to financial aid administrators, many parents will be in for a rude awakening:

· Nearly all aid administrators surveyed (97%) believe parents have a false sense of security that colleges will help them take care of the costs;
· 92% of financial aid administrators say parents overestimate the amount of scholarship money their children will receive.

Parents' misconceptions relative to financial aid are exacerbated by poor savings and investing habits and a cavalier attitude toward debt:

Of those who intend to fund at least some of their children’s higher education, most have spent more money on entertainment and/or discretionary purchases in the past year than they have saved for their children’s college costs. Specifically:
• 58% have spent more on eating out or ordering take-out;
• 49% have spent more on vacations;
• 38% have spent more on consumer electronics.

Here's an edited version of the release:

"Many families’ college savings efforts are coming up short, as parents spend freely, significantly overestimate the amount of financial aid their family will receive, and count on debt to finance their children’s undergraduate educations, according to the first-ever bilateral survey of parents and student financial aid administrators released today by AllianceBernstein Investments, Inc.

“Most parents are about as prepared to meet college costs as freshmen are to do their own laundry,” said Jennifer DeLong, Director, College Savings Plans, AllianceBernstein Investments, the retail asset management arm of AllianceBernstein L.P. “Parents’ poor college savings and investing habits have been exacerbated by grossly unrealistic expectations for financial aid. It is the Perfect Storm of planning – and if they’re not careful, for many families, the result will be a financial shipwreck.”

The Savings - Costs Gap

Parents with children ages 14 to 17 plan to have an average of $12,000 saved when their child reaches college age. The projected cost of a 17-year-old’s college education is $54,882 for a public university and $131,361 for a private college.

The gap between planned savings and projected college costs widens further for parents of younger children. On average, surveyed parents with children ages five or under plan to have $25,000 saved for their child’s college education.5 The projected cost of a five-year-old’s undergraduate education is $98,561 for a public university and $235,905 for a private college.

Even more troubling than parents’ low savings goals is the fact that many are not confident in their ability to achieve them. Only one in four parents (27%) thinks that it is “very likely” they will reach their college savings goal.

Three-quarters of parents are concerned about saving enough for their children’s college education, with more than a third (35%) saying that they are “very concerned.” About one-third (31%) of those who plan to help fund their children’s undergraduate education haven’t started saving yet.

Parents Are from Mars, Financial Aid Administrators Are from Earth

Parents’ modest savings goals and less-than-stellar track records may reflect their expectations for receiving significant merit and need-based financial aid.

Nearly all financial aid administrators (97%) agree that families have become more reliant on financial aid in recent years. Even wealthier families are looking for ways to reduce or avoid college costs, according to 99% of aid administrators surveyed.

Many parents have encouraged their children to excel in academics (72%), sports (47%) and/or artistic or musical pursuits (38%) in hopes of earning merit scholarships, and a startling number think their efforts will be successful. Almost three-quarters (72%) believe their children have “special or unique talents” that will earn them scholarship funds.

Eighty-seven percent of parents are counting on their children receiving scholarship and/or grant money, and more than two-thirds (68%) believe colleges will design an aid package that they can reasonably afford. On average, families planning to contribute to their children’s college costs anticipate scholarships and/or grants will cover about a quarter (24%) of their expenses.

But the aid administrators’ survey indicates that many parents will be in for a rude awakening.

Ninety-seven percent of aid administrators think parents have a false sense of security that colleges will help them cover costs. Two-thirds of financial aid administrators surveyed believe scholarship and grant dollars are less available for the average family today than they have been in the past, and 92% say parents overestimate the amount of scholarship and grant money their children will receive.

“The discouraging reality is that college costs have skyrocketed and federal financial aid has eroded,” said Dallas Martin, President, National Association of Student Financial Aid Administrators (NASFAA). “The result is that the doors of educational opportunity have closed for many of our nation’s youth because they cannot afford to attend college.”

Two-thirds of aid administrators (68%) believe the current financial aid system does not meet the needs of many students and their families. Nearly three-quarters (73%) say that less than half of those who apply for aid are financially able to meet their expected family contribution, and 61% think it would be a major financial hardship for the average family applying for aid to do so.

“It’s important to remember that financial aid is meant to be a last resort, not a way to mitigate college costs,” Martin said. “It’s critical for parents to have more realistic expectations for financial aid and adjust their savings efforts accordingly.”

Paying for College: A Joint Venture

Nearly all parents surveyed (95%) intend to help their kids pay for college, and 41% plan to cover all of their children’s college expenses. The vast majority, 94%, believe a college education is the best investment they can make in their children’s future.

That said, most parents feel it is important to set limits on college spending (84%) and expect their children to take responsibility for at least a portion of the costs.

Fifty-eight percent of surveyed parents will hold their children accountable for at least some of their undergraduate tuition and expenses. On average, parents who plan to share expenses with their kids say they feel responsible for footing slightly more than half (56%) of their children’s college bill.

“With college costs at an all-time high, parents are more likely to limit how much they are willing to spend on higher education expenses,” Martin said. “As a result, many young adults are picking up more of the tab for their undergraduate educations, and accumulating heavy debt burdens in the process.”

Thirty-one percent of parents who plan to contribute to their children’s education have put more money toward their children’s allowance in the past year than they have put in their college savings fund.

Almost three-quarters of parents (74%) admit they could be saving significantly more for their children’s education if they limited money spent on traveling, entertainment, electronics and impulse purchases. Two-thirds acknowledge that by reducing their discretionary spending on items such as toys, clothes and entertainment for their children, they would be able to save much more for their college educations.

“Many parents are spending today, and planning to worry about saving tomorrow,” DeLong said. “But when it comes to saving for college, it’s critical for families to start early and keep their eyes on the prize.”

Not surprisingly, when asked to grade themselves on being financially prepared for their children’s college expenses, a third of parents (34%) gave themselves a “D” or “F.”

In Debt We Trust

To fill the gap between their families’ accumulated college savings and college costs, students are relying more heavily on loans than ever before. The parents’ survey suggests that this trend will not slow down anytime soon.

Two-thirds of parents think their children will leave college with debt, and, on average, they anticipate their kids will owe about $27,500.

While most parents believe that graduating without debt is a big advantage in life, many (63%) see debt as “just a part of life.” Some even look for the silver lining, believing debt makes students focus on their studies, value their education and become more financially responsible.

Long-Term Impact of Debt

But college debt can have a profound and long-lasting effect on graduates’ financial security and life choices. In a survey of college graduates ages 21 to 35 conducted by AllianceBernstein earlier this year, 42% of those with college debt said the phrase “living paycheck-to-paycheck” describes them very well, and more than one-third (34%) had sold personal possessions to make ends meet.

Among respondents still paying off education-related debt individually and/or for a spouse, 44% have delayed buying a house, 28% have delayed having children and 32% had to move back in with a parent or guardian or live at home longer than expected.

“The road to debt is paved with good intentions,” said Michael Conrath, Vice President, College Savings Plans, AllianceBernstein Investments. “But large amounts of college debt put graduates in a hole that can take years, even decades from which to emerge. When you saddle young adults with debt, they’re not just borrowing their college tuition; they’re borrowing from their future.”

Parents’ seemingly lackadaisical attitude toward debt has financial aid administrators concerned. Many feel that parents and students alike do not fully comprehend the significant, long-term implications of education-related debt until it’s too late. Ninety-four percent of aid administrators surveyed express concern about the amount of debt students have been taking on to fund their educations, and more than half (57%) say they would not let their child borrow the average amount of loans taken out by students at their respective schools.

According to aid administrators, the problem will get worse before it gets better. Over the next 10 years, almost all of those surveyed anticipate both the percentage of students who graduate from college with loans and the amount they borrow will grow.

The Effects of a College Savings Shortfall Span Generations

A failure to plan adequately for college expenses can hurt parents down the road and result in a cycle of debt that spans generations.

Close to two-thirds (62%) of parents say paying for college will significantly affect their retirement fund.
Sixty-two percent of those who will contribute to their children’s education say they plan to dip into money they have saved outside of their college savings funds, and more than half (53%) plan to take out loans of their own to help cover the costs.

Moreover, more than half of parents of children ages 14 to 17 (56%) say it is very or somewhat likely that they will end up helping their children pay back their education-related loans after they graduate.

A college savings shortfall not only affects parents and their children, but, ultimately, it can also put their grandchildren at a disadvantage. As the earlier AllianceBernstein survey of college graduates revealed, when the time comes to start saving for their own children’s college educations, those who graduated from college with debt are less likely to be able to do so than their peers who graduated debt-free.

Parents Face Formidable Challenge; Financial Advice and 529 College Savings Plans Are Key

The fact that many families lack a comprehensive plan, don’t seek professional financial advice and are not aware or taking advantage of tax-efficient savings vehicles is a strong contributor to the problem.

Seventy percent of parents surveyed don’t have a financial plan that takes into account all of their goals, including college savings, and many (42%) have not even had a serious conversation with their children’s other parent about how they will finance their kids’ college educations. Aid administrators cite not having a plan as the number one reason parents aren’t able to save more for college.

“College financing is a fundamental life planning issue,” Conrath said. “Parents face a formidable challenge. In order to rise to the occasion they must be dedicated, diligent and ready to take advantage of all of the resources they have available to them. We believe professional financial advice and a tax-advantaged product like a 529 college savings plans have a critical role to play in any family’s college savings effort.”

The parents’ survey shows that those who work with a financial advisor are more likely to be saving for their children’s college education (79% vs. 57%) and to be confident in their efforts. About half (49%) of those with an advisor give themselves an “A” or “B” for their college savings efforts; only about a quarter (26%) of those without an advisor give themselves such high marks.

Even among the 56% of parents who have specific accounts dedicated to saving for their children’s education, the majority (61%) are not using a tax-advantaged 529 college savings plan as their primary savings vehicle. In fact, 16% of this group have all of their college savings funds in checking and savings accounts.

Nine in 10 financial aid administrators (91%) believe parents don't utilize tax-advantaged savings vehicles, such as 529 plans, as much as they should.

“When it comes to paying for college, the good news is that you have 18 years to plan, there are tax-advantaged solutions, and you don’t have to go it alone,” DeLong said.

The survey of 1,358 parents was conducted via the Internet between August 2 and August 20, 2006 by the national polling firm of Mathew Greenwald & Associates, Inc. Parents participating in the poll had at least one child under the age of 18 who they identified as likely to attend college and household incomes of $50,000 or more.

The survey of financial aid administrators was conducted over the Internet by Mathew Greenwald & Associates between August 2 and September 6, 2006. Two hundred student financial aid administrators at four-year undergraduate public or private colleges with at least three years of experience were surveyed. All respondents were either responsible or oversaw individuals responsible for awarding financial aid.


jersey jen said...

why do parents have to save for kids' college tuitions when they can't even have a comfortable retirement? they should force the kids to study hard and get scholarships, then make up the difference with student loans!

Frugal Duchess: Sharon Harvey Rosenberg said...

That's a good point.
I've also featured a piece about college savings vs retirement savings.

The number #1 priority should be retirement accounts, according to some experts.

I think the process should be a joint effort.

Thanks for your comment!

Wealthy Geek said...

It’s good to see someone starting to examine the long-term impact of student debt. It’s so true that a heavy student loan burden equals living paycheck to paycheck more often, and this has a huge impact on the economy. Unfortunately, if Gen X and Y could not escape student debt, neither will subsequent generations. It’s simply a matter of whether their eventual debt burden will be manageable or not. (The answer, at this rate, will be a big fat NO.)

Part of the solution involves parents saving more in their education funds and students starting part-time/summer jobs earlier and working longer hours. But really, those are just band-aid solutions and not particularly realistic, especially since so many people are already struggling to save for retirement, let alone for the kids’ college.

The bigger solution may be more funding – a lot more funding! – from government at all to dramatically lower tuitions and thus lower the debt burden on students. This would almost involve enacting some kind of “Students’ Bill of Rights” to ensure young people can pursue an education without facing financial ruin because of it. Politically, this could start to make sense as the economic effects of massive student debtloads start to sink in. But to do something constructive about this problem takes political will. Look at a country like Iceland: with a population of less than 300,000 people and only two or three major industries, it still offers heavily subsidized university education for all of its citizens. In the end, this is about how you want to prioritize your nation’s wealth: on educating the populace without bankrupting it, or on less-prudent investments.

Sally Parrott Ashbrook said...

I agree with Wealthy Geek that we need more government funding for education. Look at our gov't's funding of higher education compared to other industrialized nations, and you'll be appalled (or should be, anyway). But colleges also are getting ridiculous in what they build, especially in terms of playgrounds for students. We belong to the health club at Georgia Tech (where my husband is a PhD student), and the student gym is outrageous, even including a 'fun pool' (in addition to the lap pool) with a giant water slide! Even my alma maters (Berry College and Davidson College) are shelling out massive bucks to keep up with the sex appeal of what the giant schools offer. When you look at how rapidly tuition is rising (7% a year, I've read), even parents who try to plan and save can end up in a really bad place.

Little Grads' Mom said...

Dear Sharon,

Working in this industry (college savings) I see a wide range of parents, attitudes, etc.

When we were starting my company ( we found that once parents got past the first step of regularly saving *anything*, it helped in a number of ways.

1. Setting up any account, whether 529 or just a dedicated savings account, often makes parents set up auto payments, which is great financial practice to put your money where your priorities are.

2. College savings services (like ours) that provide free, extra money are often the motivator for setting up some kind of saving account. And since these services based on activity that parents do on a regular basis (online shopping), it means saving on a regular basis.

3. Once any sort of saving has started, its then easier to get the extended family involved. And grandparents and other friends often want to be involved -- they see it as a better gift and/or a great investment in the future.

We recently worked on a study that showed the difference between beginning saving during preschool vs. saving from high school years to be about $35K per family.

Ergo, I was really happy to read your article. Kudos for your decision to highlight this area, since its one of those areas where small changes make a big difference.

Best regards, Suzy

WorriedAboutCollegeDad said...

ive heard about little grad and upomise before. both seem like good services. but even participating in one of these services is not enough. i agree with weathly geek about our government. we need more funding in our schools.

100Student said...


I recently published an article on the dangers and benefits of student loans and other forms of college financial aid – here is a quote from it, in case you are interested:
Student loans repayment can be a real nightmare without adopting some strategies that would help the new graduates to organize their social and financial life. Here are some strategies they can use to do this:
- An additional part-time job;
- Freelancing is another option (meaning that they can do particular pieces of work for different organisations, without working all the time for a single organisation);
- They should try to keep their living expenses as low as possible (live in a smaller apartment, live with a roommate to share some of the expenses, find an apartment that is closer to the job, to eliminate the extra-expenses for transport etc.);
- To apply for forbearance (this is an immediate solution for hard times when the new graduate is in impossibility to re-pay the amount of money and the need for student loan consolidation becomes apparent; it is a temporary period, when the graduate can postpone or delay his or her re-payments until a later time on a federal or direct loan after the beginning of the re-payment, and when the student doesn’t qualify for deferral). The forbearance must be applied through the lenders of the loans.
- To consolidate the payments.
If you feel this help, please drop by my website for additional information, such as federal student loans information or additional resources on private student loans .