Fidelity®: Conversation on managing college debt necessary in managing it
October 30, 2013 – BOSTON–(BUSINESS WIRE)–While the number of families saving for college is at an all-time high (69 percent), many parents are missing an important step in the planning process – talking as a family about the “total cost of college.” According to Fidelity Investments®’ 7th annual College Savings Indicator study, 41 percent of families with college-bound children age 15+ have not yet had these critical discussions.
The total cost of college includes tuition, room and board, plus additional expenses related to school selection, choice of major, financing options, as well as how these college decisions may affect future earnings, job prospects, and potential student debt. Among those parents who have taken the time to talk with their older teenagers (age 15+) about how college-related decisions may affect their future outlook, 69 percent report having made adjustments to their college plans. These adjustments have led to changes in financial behaviors to help address the rising cost of college:
- 44 percent of parents explored additional funding options such as scholarships
- 29 percent of parents opted to send their children to a less expensive school
- 22 percent reported they will rely more heavily on financial aid when it comes time to send their child to school
“Saving and planning for college should be a family affair,” said Keith Bernhardt, vice president of college planning at Fidelity Investments. “With the cost of college continuing to rise, the earlier families discuss goals, the more time they will have to adjust savings strategies and consider the financial impact of their college-related choices. Teenagers should begin to understand how their college-related choices may affect their own financial future, including the potential student loan debt they may face. These conversations will help college-bound students become more accountable and better prepare them to make their own future financial decisions.”
Student Debt Remains Top of Mind and a Reality for Recent Grads
Seventy-eight percent of parents report they don’t want to burden their children with hefty student loans, yet in many cases this may be unavoidable. Three-quarters (76 percent) of parents with children in college anticipate they will graduate with debt, averaging $27,800. For those anticipating debt, parents believe it will take an average of 7.7 years to pay it back. Nineteen percent think it may take their children more than a decade to pay it back.
Unfortunately, reality outpaces these expectations, as a separate Fidelity study1 earlier this year found that 70 percent of the class of 2013 graduated with college-related debt averaging $35,200, including federal, state and private loans, plus debt owed to family and accumulated through credit cards. Furthermore, half these graduates were surprised by how much debt they accumulated.
“’Save early and save often’ continues to be the number one piece of advice from parents with college-bound children to younger parents, and a top learning from recent college grads who are now facing the realities of student debt,” added Bernhardt. “While conversations are an important part of the college planning process, so is establishing positive college savings habits as early as possible, and continuing that behavior with regular contributions.”
Use of dedicated college savings accounts, such as 529 college savings plans, continues to grow. Thirty-three percent of parents with children of all ages, report they are investing in a 529 college savings plan, up from 28 percent in 2012. Additionally, parents who demonstrate positive planning behaviors are more likely to be focused on saving for college. For instance, 56 percent of parents who have a financial plan in place to reach their college savings goal also have a dedicated college savings account, such as a 529 college savings plan. On the flip side, for those without a financial plan, only one in 10 has a dedicated account for college savings.
Parents are a Major Influence on Children’s College Studies
Choosing a college major is an important topic in planning conversations, and one that could impact a child’s job prospects and future earnings. Forty-one percent of parents with children already in college have encouraged their children to focus on a particular major in hopes they secure a higher-paying job upon graduation. The top majors recommended by parents include:
- Computer Science
- Business Management & Administration
- Information Technology
Parents who encouraged their children to focus on a specific major expect them to earn an average annual salary of $73,600 when they graduate. This stands in contrast to the average starting salary for the class of 2013 graduates – $45,3272, suggesting parents need to temper their expectations and consider how much debt is reasonable for their child to owe.
The majority of parents who encouraged their children to focus on a particular major (88 percent) are optimistic their children will find a job within six months – a higher number than those who did not encourage their child toward a specific major (69 percent).
A Guide for Parents to Initiate Total Cost of College Discussions with their Older Teenagers
Over time, Fidelity finds that families who have college-related discussions are more likely to demonstrate positive saving behaviors. For instance, 86 percent of parents who had conversations with their children about the total cost of college prior to the age of 15 have started saving. Comparatively, for those families who have not had these critical conversations, only 58 percent have started saving.
To ace this important step in the college planning process, the College Conversation Checklist can help parents initiate these discussions within their families. The checklist offers conversation starters to address the following:
- Understanding the total amount families need to save for college
- Deciding how to involve children in the college saving process
- Evaluating how school choice may influence costs and potential student debt
- Learning about financial aid and how the process works
- Calculating a reasonable loan amount (if necessary)
To help mediate these conversations, parents can also consider turning to a financial advisor. Financial advisors can help on a range of topics, from researching colleges, to choosing a major, to developing plans for paying down potential student debt. Financial advisors can play an even greater role in helping parents navigate these potentially highly charged conversations, either by providing materials, acting as a moderator or meeting directly with the child.
Other Online Resources to Help Move Your Family to the Head of the College Savings Class
Fidelity’s College Savings Resource Center provides a variety of online planning tools and calculators helpful for any stage of the college savings process, including a broad overview of savings options and strategies, plus resources to search and apply for financial aid and scholarships.
There is also a series of expert Viewpoints articles focused on college savings strategies for families planning for college:
- Get a head start on college includes five actionable steps for families with children approaching college, addressing topics from financial aid to college costs
- Student loan guide offers insights to help families better understand college funding options and the intricacies of student loans
- How much college can you afford? helps families consider the many costs of college
- The ABC’s of 529 college savings plans outlines the range of investment options and potential tax advantages of 529 college savings plans
For more information, visit here, or call Fidelity at 1-800-544-9999.
About the 2013 Fidelity College Savings Indicator
Fidelity conducted a survey of parents with college-bound children of all ages. Parents provided data on their current and projected household asset levels including college savings, use of an investment advisor, and general expectations and attitudes toward financing their children’s college educations. Using Fidelity’s proprietary asset-liability modeling engine, the company was able to calculate future college savings levels per household against anticipated college costs. The results provide insight into the financial challenges parents face in saving for college. Data for the Indicator (number of children in household, time to matriculation, school type, current savings and expected future contributions) were collected by Research Data Technology, an independent research firm, through an online survey of more than 2,500 parents nationwide with children aged 18 and younger who are expected to attend college. The survey respondents had household incomes of $30,000 a year or more and were the financial decision makers in their household. College costs were sourced from the College Board’s Trends in College Pricing 2012. Future assets per household were computed by Strategic Advisers, Inc. (a registered investment adviser and wholly-owned subsidiary of FMR LLC). Within Fidelity’s asset-liability model, Monte Carlo simulations were used to estimate future assets at a 75 percent confidence level. The results of the Fidelity College Savings Indicator may not be representative of all parents and students meeting the same criteria as those surveyed for this study.
About Fidelity Investments
Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of $4.4 trillion, including managed assets of $1.9 trillion, as of September 30, 2013. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.