Data & Research September 24, 2015

Chances Are Your Clients Are Saving for College Expenses

The retirement specialist advisory industry is still coming to terms with the opportunities and challenges of servicing 529 college savings plans.
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More parents have crafted a financial plan to reach their college savings goals this year, with 62% of parents citing a plan that guides savings for college costs, up from 59% in 2014. Parents are also using 529 plans at a greater rate (39%, up from 32% in 2014), according to Fidelity Investments’ annual College Savings Indicator Study.

The study shows parents in total expect to shoulder an average of 66% of their children’s college costs, up from 57% in 2012. However, American families are on track to save in advance just 27% of what they will need. This implies greater debt levels and reduced financial wellness for parents and children, Fidelity warns. 

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Millennial parents, those born between 1981 and 1997, are even more determined to shoulder their children’s college costs, with Millennials hoping to take on 74% of these costs—more than older generations. In addition, 46% intend to pay the college bills entirety for their children. 

Fidelity finds 71% of Millennial parents are actively saving for college, and 68% have a financial plan for this goal. Of all age demographics, Millennials are most likely to save in a college savings account (43%), save every month (79%) and have increased the amount they save every month since last year (58%). One of the reasons why Millennials are planning to be generous, Fidelity says, is that 56% of them are still paying back student loans.

“Millennials have weathered challenging economic conditions for much of their adulthood,” says Keith Bernhardt, vice president of retirement and college products at Fidelity. “Many have channeled that experience into setting college savings goals early, and taking steps to make savings a regular habit. It is critical that parents of all ages establish college savings goals that are practical for their family’s individual circumstances and get the guidance they need to ensure they have an effective savings strategy to help them achieve those goals.”

NEXT: Millennials are seeking help

More than one-third (35%) of Millennial parents are working with a financial adviser on their college savings plan, and of this group, 78% say working with an adviser has helped them get closer to their goals.

“Millennials are optimistic and proactive about covering the cost of their children’s college education, and advisers can provide them with the tools and expertise to reach those goals,” says Matt Golden, vice president of college savings for Fidelity Financial Advisor Solutions. “Among some younger parents, there are misconceptions about topics such as eligibility for financial aid, whether financial aid needs to be paid back and when to start saving. Advisers are uniquely positioned to debunk these myths and recommend strategies for effective college savings.”

To help parents determine a savings plan, Fidelity has developed the College Savings Quick Check calculator. It asks them what their total savings goal is and how many years they have left to save and then lets them now how much they should be saving every  month.

Boston Research Technologies conducted the survey among 2,470 parents between June 5 and July 6 for Fidelity.

Diversions September 24, 2015

Relative Debt Increases with Some Possible Benefits

Mounting American debt over 30 years has changed the average family’s balance sheet.
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A new report from The Pew Charitable Trusts examines how families hold debt, their attitudes toward it and how it relates to their overall financial health. The lifecycle dynamics of debt can be used to better understand the distinct phases of debt acquisition and debt reduction in families’ lives.

Over the past three decades, one of the biggest shifts in American families’ balance sheets has been the growing use of credit and households’ subsequent indebtedness. In the years leading up to the Great Recession, the average household at the middle of the wealth ladder more than doubled its mortgage debt, according to “The Complex Story of American Debt.”

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Although Americans’ debt has decreased in the past six years, housing—which still is the largest liability for most households—and other debt remain higher than they were in the 1990s and student loan obligations have continued to grow, according to the report.

Debt is particularly problematic for low-income households, whose liabilities grew far faster than income after the recession. Their debt was equal to just one-fifth of their income in 2007, but that proportion had ballooned to half by 2013.

Debt may compromise households’ immediate financial security, prevent them from saving, or limit their ability to invest in their own or their children’s economic mobility. But there’s an upside to some types of debt, the report says. Sustainable debt—which allows them to avoid financial emergencies or invest in their futures without putting undue pressure on their present-day budgets—can also be a positive force. Without such debt, many families would not be able to achieve homeownership, obtain college degrees, or start businesses.

Debt’s relationship to the stability of American families’ balance sheets is often unexpected. For the silent generation, those with the least debt are among the most financially secure; among Gen Xers and Millennials, the most financially stable are also those with the most debt.

Among other findings:

  • The rise in debt has not corresponded to a similar increase in household income.
  • Even middle-wealth households held over $7,000 more debt, on average, in 2013 than in 2001 and previous years.
  • Despite these trends, the typical American family still has more assets than debt.

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