How Americans (Actually) Save for College

This week, Sallie Mae and Gallup released “How America Saves for College”, an annual report on higher education savings behaviors. The whole survey deserves a read, but here are a few highlights:

• Only 32% of low-income families (those making under $35,000 a year) have saved for college. By contrast, 62% of all families have saved for higher education.
• The current economy is impacting college savings behaviors. For example, 36% of low-income families are saving less for college than before. Only 5% are saving more.
• Families making under $50,000 who are currently saving for college put away, on average, larger amounts than those making between $50,000 and $150,000.
• Families making under $50,000 annually save 7.5% of their income for college, on average. By comparison, the average college savings rate among all income levels is 3.6%.
• In order to reach estimated “savings goals,” low-income families need to save nearly 10% of annual income until a child reaches college. On the other hand, families of all income levels only need to save 5.7% of annual income to reach their savings goals.
• 529 college savings plans are the third most popular savings vehicle for college – with one-third of all families using them.
• Only 4% of low-income families consider themselves “very familiar” with 529 college savings plans. A whopping 75% were “not at all familiar.”

What are the key takeaways from this survey? And how can we apply these findings towards enlightened federal policy?

First, this provides yet more evidence that the poor can save, when given the opportunity to do so. In fact, annually, lower-income families are outpacing higher-income families in both savings rates and amount saved. See the graph at the bottom for the breakdown.

Despite the admirable behavior, low-income families are expected to save a much greater percentage of their income to reach savings goals. While families of all income levels expect to need 5.7% of income socked away for college, lower-income families need to save 9.9% of income. Low-income savers are putting away more than the 5.7% that the average family needs, but less than the 9.9%.

The importance of these numbers is twofold: First, those lower-income families that are saving are outpacing families higher up the income spectrum, which makes the importance of facilitating enrollment in college savings vehicles paramount – especially considering that low-income families that do not save vastly outnumber those that do. Second, the playing field needs to be leveled for lower-income savers in order to reduce the need to save one-tenth of income on higher education.

Near the end of the report, families are asked what would motivate them to save more. Two of the more striking answers:

• Over half (52%) of low-income families would be “very likely” to save more if presented with a matching contribution from an employer.
• If money in college savings accounts were excluded from financial aid eligibility consideration, nearly a third (32%) of low-income families would be “very likely” to save more.

These two answers are noteworthy, as there are current policy models to provide these incentives (or remove disincentives, as is the case with the latter issue). First, the state of Illinois recently passed legislation creating a tax credit for employers to provide 529 plans. Additionally, 11 states currently provide matching funds for 529 plan contributions to families below certain income levels, similar to employer matches in retirement plans.

Second, a handful of states have already excluded assets in college savings plans from financial aid calculations. However, current federal policy dictates that 5.6% of the assets in a parent-owned 529 plan can be used in federal financial aid calculations. 5.6% may not seem like much, but any penalty may discourage low-income families from saving out of fear that Pell Grants and other forms of aid will be taken away if they save. By excluding all 529 assets from consideration, federal policymakers could remove a significant disincentive that many families cite as a reason for not saving.

Broadly, low-income families should not be discouraged from saving and should not be expected to save nearly twice the percentage of income for college as higher-income savers in order to meet the expected cost of higher education. This survey should provide policymakers with an impetus to focus on some of the existing and promising policy models for making saving for college easier on families that have already shown they can do it.