Parents unnerved by economic turmoil but still saving for kids' college

Despite rising tuition and falling 529 plan balances, American parents say saving for their children's higher education is still worth the old college try.

According to a study by Fidelity Investments, 81% of parents believe college remains worth the price of admission even in the face of spiraling costs. That said, 29% aren't sure of what the cost will be by the time their child matriculates, and 6 in 10 use “their own best guess” to estimate college costs.

“With high inflation and market uncertainties, meeting day-to-day financial needs is harder than ever for many families, making future costs such as college much more challenging,” Rita Assaf, vice president of retirement and college at Fidelity Investments, said in a statement.

The recently announced federal student loan debt forgiveness program does offer some relief. However, Assad said planning ahead for future college costs goes a long way, adding that “parents would never recommend their kids not plan for a test and simply guess at the answers as the strategy is unlikely to be very successful. Similarly, parents can’t afford to not be prepared when it comes to saving for the rising cost of college.”

Fidelity’s study, which has been conducted regularly since 2007, found that economic and market uncertainty have replaced Covid-19 as parents’ major concern when it comes to saving. For example, the survey revealed that market volatility is the primary worry of 4 in 10 of those parents decreasing their college savings this year. Nevertheless, even in the face of the recent market volatility and inflation fears, 83% of parents still plan to either increase or stay the course with their savings strategy this year.

“While it may be uncertain what the exact costs of higher education may be years from now, the directionality of these costs is near certain," said Dillon Christensen, senior vice president at Evoke Advisors. "This may prove the even greater importance of setting aside money today in an investment account that can grow over time. This savings could be used to invest in a 529 College Savings account which can grow tax-free over time to eventually be used for college expenses.”

Concerns about student loan debt are nothing new to the parents Fidelity surveyed. For instance, 22% of respondents were still paying off their own student loan debt, while nearly 9 in 10 (88%) say that once they’re finished paying back their own student loans, that money will be used for their child’s college savings. The study also revealed that nearly one-third (30%) of parents with loans haven't started saving for their child’s education at all.

In a noteworthy surprise, the study showed that parents ranked "saving for college" as their top savings priority, even surpassing retirement for the first time in years. Unfortunately, more than one-third (35%) of parents planning to pay for at least some of their child’s education don’t have a financial plan in place, the study showed.

Communication between parents and children on the topic certainly helps. Fidelity’s study found that 86% of parents who have talked to their child have started saving, compared to 63% for those who have not had a conversation. Moreover, 45% of parents who talked to their child about saving opened a 529 college savings account, compared to the 32% who had not.

“In my experience, the best strategy to use when targeting education savings is to actually nail down the goal. Do you want to save for four years of in-state or private university costs? Will you offer graduate school? Or do you want to provide a certain dollar amount, like $10,000 a year?" said Beth Bosworth, head of wealth planning and wealth adviser at Perigon Wealth Management. "First, determine what you are offering and then run the savings analysis with a best guess of inflation. Be sure to exhaust all possible scholarships and grants, as well, using some of the excellent websites and resources that exist.”