Even parents who know they'll pay for their kids' college are waiting too long to start saving
The study found that parents are planning to pay more than 40% of their children's college costs. But the reality is that most are still coming up short.
Of the 57% of parents who are currently saving for their child's college education, the average family didn't start saving until their oldest child was 7 years old. In many cases, that's too late.
Parents are missing out on the incredible power of compound interest - earning money on your money - by not contributing to a college fund for the first seven years of their child's life. And once they do start saving, the majority are putting money intended for college into a general savings account (61%) or checking account (38%), admitting that those accounts not earmarked for college could easily be used for "other household expenses," according to Sallie Mae.
But a rising percentage of parents - up to 37% from 27% in 2015 - are capitalizing on 529 college savings plans - state-sponsored tax-advantaged investment accounts that anyone, including grandparents and other family members, can open and contribute to.
With a 529 plan, savings can start at a child's birth - or even before birth by using a qualifying family member as a beneficiary and switching it over to the child once they're born - and grow steadily until age 18.
It's no surprise then that parents who use a 529 end up with higher savings than those who don't, racking up an average of $7,534 compared to $7,448 in an investment account, $6,043 in a general savings account, and $5,004 using a certificate of deposit.
With an average college savings goal of $61,902, parents who are quick to open up a 529 - which has a maximum contribution of $14,000 per year, per child, and per donor - are able to enjoy the power of compounding and the benefits of a tax-free savings account.
Since the plans are state-sponsored, each state runs one or more of their own, and savers are allowed to choose which they prefer. At savingforcollege.com, there are 111 options, and each one has a slightly different investment structure - the site lets you compare investment options, fees, and various tax benefits of each plan.
Additional reporting by Libby Kane.