ShareThisBy LEN BOSELOVIC
Pittsburgh Post-Gazette
Wednesday, September 12, 2007
American parents are headed for trouble because they are using debt rather than savings to finance their children's college education, the College Savings Foundation reports.
The non-profit organization said Wednesday that 27 percent of the families it surveyed have saved nothing for college. Another 27 percent have saved less than $5,000 for each child, not enough to pay the tuition bills for most colleges.
Many of those who are saving are investing too conservatively in certificates of deposits and other investments that won't keep pace with rising college costs and they are not using the tax breaks offered by 529 college savings plans, the foundation stated.
Nearly 40 percent of parents expect it will take at least 10 years to repay loans they take out for college, including 10 percent who expect it will take more than 20 years. Only 17 percent expect to pay off college loans within five years.
Foundation secretary Chuck Toth said parents who are living for today and taking a "pay-after-you-go" approach to college probably won't retire as early as they'd like.
"These findings highlight a looming crisis for American parents and their children," he said. "It's dangerous for parents to begin seeing the financing of their children's college tuition as a second mortgage."
The results are based on a survey of 447 parents nationwide. Of those polled, 53 percent said college is their top savings priority over retirement, a house or other objective. And 68 percent said they expect no help in paying for their child's education.
About 30 percent of the parents are saving through state-sponsored 529 plans, which offer significant advantages. Earnings in the accounts are not taxed. Neither are withdrawals as long as they are used for tuition, room and board, books and other qualified college expenses.
Moreover, 529 accounts are controlled by parents even after the child becomes an adult. Parents can use the money for a second child if an older sibling decides not to go to school or there is money left in the account after the older child graduates.
Other government action has also given 529 accounts a boost. Pension reform legislation enacted by Congress last year made qualified withdrawals from 529 accounts tax free permanently. That feature had been set to expire after 2010.
Toth said investors hold about $100 billion in 529 plans, up from $77 billion a year ago. Yet 54 percent of those surveyed weren't familiar with the plans or didn't know how they work.
The foundation's findings aren't that different from studies showing many investors aren't saving enough for retirement.
Although saving enough for both is difficult, parents should not jeopardize their retirement by footing too much of their children's college bill, says James Holtzman of Legend Financial Advisors in McCandless, Pa.
Federal tax law lets parents pay for college expenses with money in their Individual Retirement Accounts without paying the 10 percent early withdrawal penalty, but Holtzman never recommends doing that.
"The IRAs are there for retirement purposes," he said. "Everybody feels they need to fully fund their child's education and then they turn around and find their retirement account isn't what it should be."
