So how does America pay for college?

Posted by on October 3, 2013 @ 3:00 pm in Personal finance

It seems that not a day goes by that I don’t see a headline about the soaring costs of college or the crippling debt facing many students upon earning their degree. My thoughts immediately go to my sister and brother-and-law, who just sent their first child off to college last month. Through a combination of funds–their disciplined college savings, current income, and my nephew’s scholarship–they’re able to pay the college bill.

Their approach seems to be fairly representative of the typical college student and family funding situation, according to Sallie Mae’s recently released report, How America Pays for College 2013 (SallieMae.com/HowAmericaPays). The annual study tracks the resources American families use to pay for college and also their attitudes toward college funding. In its sixth year, the studies have been able to identify pre- and post-recession trends.

American families are settling into a post-recession reality of how to fund college, the study found. Over the past three years, parent income and savings have paid for a smaller share of total college costs: 27% in 2013, down from 2010’s peak funding of 37%. The decline was due primarily to a drop in the average contribution from parents’ current income, most likely because of the economic downturn.

In 2013, however, the study showed an increase in funding share from 529 college savings plans, which covered 7% of college costs. This increase came primarily from more families using 529s.

In 2013, parents in approximately 60% of families funded college through personal income and savings. Each year, the study found that parent income is used more frequently than all other parent contribution types, but the frequency with which parents use income has dropped over time and currently stands at 52% (see Figure 1). A significant change this year is the increased frequency of 529s; currently 17% of families use them to fund college, which represents the highest percentage since the survey started.

Figure 1.  The role of non-borrowed funding sources to pay for college

The role of non-borrowed funding sources to pay for college

Sources: Vanguard, How America Pays for College 2013, Sallie Mae 2013.

The distribution among wealth cohorts is interesting: 11% of low-income families in the study are using 529 plans to pay for college, 16% of middle-income families, and 26% of high-income families. * While it’s encouraging that a record number of families are reportedly using 529s, the percentage is still low. Perhaps there’s a misguided notion that 529 plans are just for the wealthy. But the benefits that these plans offer–federal (and often state) tax advantages, flexibility, account control, impact on financial aid eligibility–apply across income levels.  While 529s have become the preferred vehicle for college investing, it’s important to consider cost, plan investment options, and state tax treatment when making your selection.

A few general tips come to mind for college savers. First, be realistic about college costs. Use online resources to better understand college costs and financial aid options. Second, consider a 529 plan to take advantage of the benefits (see vanguard.com/college to learn more). Third, commit to a savings program early so that you can reap the benefits of compounding (and get family and friends involved whenever possible… birthday money can add up!).


* For purposes of this study, low-income families have been defined as those with an annual household income of less than $35,000, middle-income are families with an annual income from $35,000 to less than $100,000, and high-income families are those with an annual income of $100,000 or more.