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College savings may not be in best accounts

Parents are still saving, but some are struggling and some are using retirement accounts, not the best choice.

By Teresa Mears Oct 6, 2010 3:06PM

The good news is that families are saving more for college.

The bad news is that they may not be keeping those savings in the most appropriate types of accounts, according to a new Gallup survey commissioned by Sallie Mae, which provides student loans and college savings plans.

 

Almost one-fourth of all college savings is in retirement accounts, including 401ks and IRAs.

 

Sallie Mae noted in a news release:

Twenty-four percent of saving-for-college parents risk their financial future by using retirement accounts to save for college and make other costly mistakes by not investing in tax-advantaged options, such as 529 college savings plans.

Parents also say they won't be able to make as large a contribution toward their students' college costs. Only 27% expect to be able to pay for most of their child's education, down from 33% last year. Only 72% expect to pay half or more, down from 79% a year ago.

 

"They're adjusting their expectations to the economic conditions, both generally and what they may be experiencing on the individual level," Bill Diggins of Gallup told The Washington Post.

 

Using retirement accounts for college savings plans has a number of drawbacks. The Post explained:

Financial experts say that raiding retirement accounts to pay for children's college can be risky. There are tax penalties and other fees if money is withdrawn from the accounts early, and loans against a retirement plan come with restrictions on how quickly they must be paid off and the amount that can be borrowed.

The survey also found:

  • Families with children who are likely to attend college rank saving for college as important as saving for retirement. About 20% rank saving for college as their top financial priority, up from 14% last year.
  • 60% of parents have saved for their child's college education, unchanged from last year.
  • Families who are saving for college have an average of $28,102 saved and are expected to have $48,367 by the time the child is 18.
  • 34% of families are saving less for college, 28% are saving more and 38% are saving about the same amount for college as they did last year.
  • Of the money families have saved for college, 23% is in retirement accounts. About 12% is in 529 plans, 21% in other investments and 14% in savings accounts or CDs.

Despite economic woes, parents are still determined to save for their kids' education.

"We're finding people will pay for and sacrifice for things they value," Diggins told The Associated Press. "It's clear from these studies that they continue to place a high priority on college for their kids."

 

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