Parents Are Stretching Their Finances to Pay for College—Here’s What Investors Must Know Now
The relentless rise in college costs is pushing American parents to dig deeper into their pockets—and sometimes their retirement savings—to fund their children’s higher education. According to the latest Sallie Mae research, a staggering 79% of parents admit they’re willing to stretch financially to help cover college expenses. In 2023-2024, parent income and savings accounted for 37% of average college spending, underscoring the heavy financial burden parents are shouldering.
But this trend raises critical questions for investors and financial advisors alike: How sustainable is this approach? What strategies can families adopt to protect their long-term financial health while supporting college costs? And what should investors do differently in today’s environment of soaring tuition inflation?
The Growing Financial Strain on Parents
College costs have surged dramatically over the past decades. CBS News reports that tuition, fees, and room and board have jumped by 155% between 1980 and 2023, far outpacing general inflation. Families spent an average of $28,409 on college in the 2023-24 academic year—a 12% increase from just two years prior. This relentless inflation means parents are increasingly relying on their income and savings, with about three-quarters of families tapping into these resources to fund education.
Mark Kantrowitz, a leading expert on student financial aid, warns that borrowing to pay for college can jeopardize parents’ retirement security. “It’s cheaper to save than to borrow,” he says, highlighting the risk that parents taking on loans today may have to drain retirement funds later to repay them.
The Power—and Limits—of Early Savings
One of the most effective tools families use is the 529 college savings plan, a tax-advantaged account designed specifically for education expenses. According to the Education Data Initiative, there are 16.8 million 529 accounts nationwide, with 35% of families using these plans and saving an average of $6,844 each.
Molly Ward, a certified financial planner with Equitable, emphasizes the importance of starting early. “The sooner, the better, because that’s compounding interest,” she notes. Investing in vehicles that can outpace college inflation is key to making meaningful progress.
Yet, many parents start saving late or not at all. Kantrowitz advises even small contributions matter: “It’s never too late to start saving—even $5 a month can add up over time.” This is where modern investment platforms like Wealthfront shine, allowing investors to start with as little as $1 and build diversified portfolios tailored to their risk tolerance.
What Investors and Advisors Should Do Differently Now
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Prioritize Early and Consistent College Savings: Financial advisors should encourage clients to integrate college savings into their broader financial plans early on. This means educating young families—even those without children yet—about the benefits of compounding and starting small.
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Balance College Funding with Retirement Goals: Given the risk of retirement funds being tapped for education costs, advisors must carefully balance these priorities. A comprehensive plan that protects retirement while funding college is essential. Consider strategies like conservative investment allocations for near-term college expenses and more growth-oriented portfolios for long-term retirement savings.
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Leverage Tax-Advantaged Accounts and Explore Loan Options: Maximize the use of 529 plans and understand their flexibility, including the ability to transfer funds to relatives if plans change. Additionally, families should be well-informed about private loan options with competitive rates, such as those offered by College Avenue, which provide flexible repayment terms and can be a useful supplement when savings fall short.
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Stay Ahead of Tuition Inflation: With college costs rising faster than general inflation, it’s crucial to regularly review and adjust savings strategies. Incorporating investments that historically outpace inflation—such as diversified equity portfolios—can help maintain purchasing power.
What’s Next?
Investors should expect college costs to continue climbing, potentially accelerating with broader inflationary pressures and shifts in higher education funding. The recent Sallie Mae data showing a 15% increase in families planning for all college years before enrollment signals a positive shift toward proactive financial planning. However, many families remain vulnerable without a clear strategy.
At Extreme Investor Network, we believe the future of college funding lies in a dual approach: start early with disciplined savings and remain flexible with financing options. Advisors must also sharpen their focus on educating clients about the long-term trade-offs of borrowing versus saving.
Unique Insight: The Hidden Opportunity in Grandparent Contributions
An emerging trend we’re watching is the increasing role of grandparents in college funding. According to a 2023 Fidelity report, nearly 40% of grandparents plan to contribute to their grandchildren’s education. For investors, this opens new avenues for multi-generational planning—leveraging 529 plans owned by grandparents can provide tax advantages and reduce the financial strain on parents.
Actionable Takeaway for Investors and Advisors
- Start or Boost 529 Contributions Now: Even if you’ve delayed, set up automatic monthly contributions to harness compounding.
- Review Your Investment Mix Annually: Adjust portfolios to keep pace with college inflation and market conditions.
- Educate Clients on Loan Alternatives: Highlight private loan options with favorable terms as a last resort, ensuring they understand the long-term impact.
- Consider Multi-Generational Funding Strategies: Engage grandparents in the conversation to expand the financial support network.
The rising cost of college is a formidable challenge—but with strategic planning and informed investing, families can navigate this landscape without sacrificing their financial future. Stay tuned to Extreme Investor Network for the latest insights and strategies to help you stay ahead.
Sources:
- Sallie Mae 2023-24 College Savings and Spending Report
- CBS News, College Tuition Inflation Data 2023
- Education Data Initiative, 529 Plan Statistics 2024
- Fidelity Grandparent Survey 2023
- Expert commentary from Mark Kantrowitz and Molly Ward, CFP