Sleeping Better: Common Sense Creeps Into Student Debt Equation

By Dan Kadlec

September 26, 2018

Financial education now, less pressure later

Families are feeling better about their ability to pay for college, new research shows. This is partly due to more systematic saving. But common sense seems to be playing a role too.

College 529 savings plans, which grow tax-deferred, are now the most popular way to put away money for school, according to the T. Rowe Price Parents, Kids & Money Survey. Some 44% of families save this way, up from 27% two years ago, when regular bank savings accounts with no tax advantages topped the list.

Fewer parents are raiding dedicated college savings for other purposes, according to the survey. Hallelujah. Meanwhile—and here comes the common sense—a whopping 74% of parents say they would send their kids to a less expensive school to avoid loans, up from 62% last year.

These are encouraging trends that financial educators should consider drawing on in the classroom. As more families openly discuss college costs at home, and adjust their thinking, educators enjoy greater entrée to a critical area of study—one that is still sorely lacking in most kids’ school experience.

Only 24% of young adults had a stand-alone course in personal finance while in school, the survey shows. Another 33% had some personal finance instruction as part of another course. Together, these lessons were heavily tilted toward simple banking and budgeting concepts. Less than half of the coursework touched on education debt. And if you are looking for a real blind spot, just 13% of the courses discussed diversification and asset allocation.

Make no mistake: money talk at home coupled with lessons at school makes a big difference. Young adults who spoke about money with their parents as children are more than twice as likely to save for their own kids’ college education, the survey found.

These trends are allowing parents to sleep better at night. Only 27% of parents report losing sleep over college costs, compared with 41% last year, according to the survey.

One reason that parents feel better about paying for college is they have gotten real about the burden of student loans and lowered the cap on what they are willing to spend or borrow. Parents willing to take on more than $75,000 in student debt have fallen to 14% from 28% two years ago, the survey found.

An earlier survey from Fidelity adds texture to this finding. It also revealed that parents are saving more for their kids’ college costs but suggests that parents feel they are tapped out and have drawn a line in the sand. Going forward…

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…they expect their kids to shoulder more of the expense.

The average parent of a high school sophomore expects their child to have set aside $15,385 for college by high school graduation—up from $12,431 two years ago, Fidelity found. Just 49% of parents feel it is their obligation to foot the entire college bill—down from 56% two years ago, according to that survey.

Student loan wariness is at such high levels that parents are placing stricter limits on the amount they will allow their kids to take on. Some 20% now prohibit any debt at all, up from 17% last year. “This speaks to the increased sensitivity parents have to the consequences of education debt and the long-term effect it can have on both their and their children’s lives,” says Stuart Ritter, senior financial planner at T. Rowe Price.

The survey also found that more parents are using the cost of college as a teachable moment to discuss money with their kids. More than a third do so, ranking just behind back-to-school budgets, shopping for sale items, and calculating a tip as top teachable money moments.