Reuters Money

Nine in ten parents in the U.S. plan to send their child to college, and they’re increasingly taking steps to make that a financial reality, according to a new poll released Oct. 5. Still, many need to do more homework on how to avoid costly mistakes while saving.

The U.S.’s biggest student loan company, Sallie Mae, and polling firm Gallup just released results of a survey, conducted last spring, of about 2,000 parents nationwide with offspring under the age of 18. Sixty percent reported that they were saving for their son or daughter’s college education and were, on average, on track to save more than $48,000.

“What’s remarkable is, despite all the economic problems of the past two years, parents are still optimistic about their children going to college,” said Bill Diggins, Gallup’s lead researcher on the study. “More and more, they prioritize college savings as much as retirement or more because they see real value in higher education.”

Most parents who aren’t saving yet say either they don’t know how or aren’t sure of the soundest approach, the Sallie Mae-Gallup study concluded. Yet, even families who are putting away funds may not be employing the best vehicles.

Half of parents rely on traditional savings accounts or CDs, while, more alarmingly, 24 percent are using retirement accounts, including 401(k)s. That practice leads to added fees and tax penalties when the funds are withdrawn. Plus, once they have taken out the money, it counts as income for the next year’s financial aid assessment. “These families are just digging themselves into a deeper hole,” said Sarah Ducich, senior vice-president for public policy at Sallie Mae.

In the majority of cases, a better alternative is a 529, a low-cost savings account that is tax-free if it is used to pay for education-related expenses. But parents had saved an average of just $3,340 in 529s versus $6,503 in retirement accounts. Nearly half of those not using 529s implied they weren’t taking advantage of the tool and associated tax breaks because they didn’t know enough about 529s. “Education about the benefits of a 529 and how they work definitely needs to improve,” Diggins said.

Nonetheless, families who do save are not only expected to meet their goals but to surpass them. The survey estimated that, on average, savers would put aside nearly $6,300 more than planned. Moreover, while the proportion of families who save does go up as income rises, low- and middle-income families, for whom saving for college can make more a incremental impact, are more dedicated to the task.

“Compared to wealthier families, those in lower income brackets save about double the portion of their annual income,” Ducich said. African-American and Hispanic parents were also more likely to prioritize college rather than retirement saving than their white peers.

Further new evidence suggests this confidence pays off: recent analysis by the nonprofit College Board found that college graduates earn more and are far less likely to be unemployed than those with less schooling — and that gap continues to widen each year. What’s more, education “pays out more than just dollars,” said Sandy Baum, an independent policy analyst for the College Board. “If you have a college degree, you are more likely to exercise, volunteer, vote and read to your kids.”

Still, it’s no secret getting a university degree can be pricey— the College Board estimates that, for the 2009-2010 academic year, the average price tag at a four-year public school soared as high as $5,900 annually and $32,000 at a private institution. And fewer parents this year report planning to pay at least half of their child’s college costs than in 2009. “That drop is probably due to a combination of cost concerns and the recession,” Diggins said.

How, then, can parents be motivated to save even more? Matching contributions by employers similar to a 401(k) account, tax incentives and a guaranteed interest rate top the list of possibilities among those adults surveyed by Sallie Mae and Gallup. The availability of all these options would require political will to increase, according to Ducich. “We’d have to see the federal government make encouraging more savings a much larger part of the public agenda than it currently is,” she added. Until then, families appear to be off on a good start all on their own.

Photo: REUTERS/Adam Hunger