BOSTON--(EON: Enhanced Online News)--As high school seniors across the Commonwealth eagerly contemplate where they’ll head to campus this fall, it’s a reminder for parents with younger children to revisit the age-old question “are we saving enough for college?” For many Massachusetts families, the answer remains elusive. According to the annual College Savings Indicator Study conducted by Fidelity Investments® and the Massachusetts Educational Financing Authority (MEFA), nearly half are hungry for additional education when it comes to how to best save for college, with seven-in-ten seeking more specific guidelines to define how much they should be saving. The difficulty in identifying how much parents should be setting aside may contribute to the fact that the average Massachusetts family is currently on track to save only 36 percent of the amount of college costs they intend to cover by the time their child graduates high school1.
“Every family’s situation will be unique, which means there isn’t a one-size-fits-all answer to the question of how much to save”
To bring more clarity, Fidelity and MEFA have designed a new College Savings ‘2K Rule of Thumb’ and customizable College Savings Calculator, providing parents with the ability to estimate how much they should be saving—whether they’re just getting started or already thinking about campus tours.
Taking into account that the average family leverages multiple sources to fund college costs2, the ‘2k Rule of Thumb’ focuses solely on savings3. Assuming a goal of covering 50 percent of annual college costs for a four-year public school from savings, the rule is simple: multiply your child’s age by $2,000. Applying this rule, if your child is seven years old:
$2,000 x 7 years old = $14,000
This total represents how much you should have saved to date to be on track, assuming you will continue saving at the same rate and that your child will be age 18 come time to head to campus.
“Every family’s situation will be unique, which means there isn’t a one-size-fits-all answer to the question of how much to save,” said Keith Bernhardt, vice president of college planning at Fidelity. “However for many, a savings rule of thumb provides a much-needed starting point from which parents can build a more robust plan to meet their goals.”
Customizing Your Savings Plan
While the ‘2K Rule of Thumb’ is a simple way for Massachusetts parents to calculate general savings guidelines, for those who may want to cover more or less of college costs, the rule can be flexible. Taking advantage of Fidelity’ new mobile-friendly and easy to use College Savings Calculator can help families tailor the rule to apply to their specific situation. By answering a few basic questions, the interactive calculator can quickly provide a customized view of how current college savings measure up and how much more they need to put aside moving forward to meet their goals.
- How Much Will It Cost? When it comes to the cost of college, the price difference between public and private schools can be substantial. According to College Board, the current cost of a four-year in-state public college is estimated to be $20,090 per year versus an annual cost of $45,370 for a four-year private college.4 By inputting the cost of one year of school in today’s dollars, our savings rule of thumb and calculator applies how those costs may grow by the time your child heads to campus.
- How Much Will You Cover from Savings? Research shows parents continue to be committed to helping their children pay for college, in some cases influenced by their own experience with student loan debt, and others simply wanting to help their children get off to the best financial start they can. While parents often take the lead in covering college expenses, it is still the case that most families don’t cover the full cost from savings. Parental and student income, grants, loans and scholarships all play a role as well.
- How Much Have You Saved So Far and How Long Do You Have Until College? Whether you started saving early or you’re catching up, increasing your savings and ensuring it is invested appropriately can provide the best opportunity for growth to achieve your goals.
“Our mission at MEFA is to help families create a pathway to plan, save and pay for college,” said Tom Graf, Executive Director of MEFA. “This calculator is an excellent tool which will allow families a straightforward way to help develop their plan and work towards their college savings goals.”
How to Jump Start Your College Savings
The good news is that more parents are motivated to save than ever before, according to Fidelity and MEFA’s research and customer data5. More Massachusetts families have started saving, are saving in dedicated college savings accounts, like U.Fund College Investing Plan accounts and have established financial plans to help them stay on track with their college goals.
For families looking for additional ways to kick their savings into high gear, check out these ways to give your college account a boost:
- Beat Procrastination: The best way to stop putting off saving for college? Make saving a habit by automating your monthly savings. Your college savings plan provider can help automate your college savings contributions so that regular monthly payments are transferred directly from your bank account. Or consult the human resources office at work for help, as many companies offer direct deposit as an option to put part of your paycheck into a college savings account. The easier you make it to save, the less likely you may be tempted to skip contributing.
- Dedicate an Account to College Goals: Consider using a dedicated account to save for future higher education expenses. One option is a tax-advantaged U.Fund College Investing Plan, which allow you to invest savings that can grow over time, while account earnings can be withdrawn federal income tax-free for a range of college expenses. Saving in a dedicated account can also help families stick to their savings plan and feel more confident in reaching their goals. Fidelity and MEFA research finds that 77 percent of Massachusetts residents that own a 529 account have a financial plan in place to meet their college savings goals, and on average, have saved nearly $25,000 more than families without a 5296.
- Invest Your Best: One key to reaching your college savings goals may be to adopt an age- appropriate strategy that reflects your child’s time horizon to college. Each year, revisit your plan to make sure the asset allocation suits your needs. 529 college savings plans can offer a range of investment options from low-cost index funds to actively managed age-based funds, which provide an age-appropriate asset allocation as your child grows up. Learn more about Fidelity-managed U.Fund College Investing Plan investment options here.
- Dedicate to Innovate: Whether it’s cutting out one restaurant visit a month, committing a percentage of a tax refund or paycheck bonus, or earmarking earnings from cash back credit cards, there are creative ways to save a little more each month that can significantly impact the growth of your college savings account over time. For more strategies to help families save and stay on track, check out this Calendar of College Savings Strategies.
MEFA and Fidelity offer complimentary college saving and financing guidance provided by dedicated representatives who are available to answer questions regarding savings options, including how to open a U.Fund College Investing Plan account. Additionally MEFA and Fidelity offer in-person college planning guidance at Fidelity’s nine investor centers across Massachusetts or by calling 800-544-2776.
At www.mefa.org, MEFA provides free, expert guidance on planning, saving and paying for college, as well as links to career planning and financial aid resources. In addition, MEFA’s community outreach includes more than 400 webinars and seminars annually led by college
planning experts across Massachusetts. Parents can visit Fidelity.com/ufund to access online planning tools, research college savings options and learn how to search and apply for financial aid and scholarships. Families can also learn about 529 online gifting, a service that enables owners of U.Fund College Investing Plan accounts to create a personal college savings webpage for their child or other beneficiary and share a link with family and friends interested in gifting to the account online.
Fidelity’s College Savings Learning Center provides a library of online resources for parents, including video courses on saving account options and strategies, additional calculators and other tools and resources on supplementary ways to pay for college, such as how to apply for financial aid and scholarships. Additional Viewpoints articles provide more insights on college topics, including: Are your college savings on track? and Five lessons learned for college savings.
About Fidelity Investments
Fidelity’s mission is to inspire better futures and deliver better outcomes for the customers and businesses we serve. With assets under administration of $6.0 trillion, including managed assets of $2.2 trillion as of March 31, 2017, we focus on meeting the unique needs of a diverse set of customers: helping more than 26 million people invest their own life savings, 23,000 businesses manage employee benefit programs, as well as providing more than 12,500 financial advisory firms with investment and technology solutions to invest their own clients’ money. Privately held for 70 years, Fidelity employs 45,000 associates who are focused on the long-term success of our customers. For more information about Fidelity Investments, visit https://www.fidelity.com/about.
The Massachusetts Educational Financing Authority (MEFA) is a not-for-profit self-financing state authority dedicated to making higher education more accessible and affordable for students and families across the Commonwealth of Massachusetts. MEFA was created by the state legislature, at the request of Massachusetts colleges and universities and provides community education programs, college savings plans, and low-cost financing options. In its over 30 year history, MEFA has assisted hundreds of thousands of families in financing a college education. For more information, visit www.mefa.org to learn more or follow MEFA on Twitter @mefatweets and on Facebook at mefaMA.
The U.Fund College Investing Plan is offered by MEFA and managed by Fidelity Investments. If you or the designated beneficiary is not a Massachusetts resident, you may want to consider, before investing, whether your state or the designated beneficiary's home state offers its residents a plan with alternate state tax advantages or other benefits.
Units of the Portfolios are municipal securities and may be subject to market volatility and fluctuation.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Fidelity, Fidelity Investments and the Fidelity Investments & Pyramid Design logo are registered service marks of FMR LLC.
MEFA, MEFA U.FUND MASSACHUSETTS 529 PLAN and U. FUND are registered service marks of the Massachusetts Educational Financing Authority.
Please carefully consider the plan's investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest or send money.
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© 2017 FMR LLC. All rights reserved.
1 Fidelity Investments, Fidelity Investments College
Savings Indicator, August 2016
2 Sallie Mae, How America Pays for College 2016
3 Notes on Methodology: The analysis models a hypothetical investor's savings behavior in different market scenarios. Using the characteristics of the "average American" compiled from industry data such as:
- School type and cost – four-year public in-state college costing $20,090 per year
- Growth of college costs – 3% per year above inflation
- Desired savings percentage – 50% of gross tuition, fees, and room and board
- Time horizon and duration – assumed college start age of 18 and a four-year college duration
The rule of thumb assumes the hypothetical investor begins saving at the
birth of the student. It then solves for the flat, real (grows with
inflation) annual savings amount to meet the required spending need in
18 years. The spending need uses today's cost-per-year estimate and
grows it annually by 3% + inflation until the expense is incurred over
four years. The resulting savings level varies by market conditions but
a “college x factor” (which helped to establish the 2K rule of thumb) is
determined at the 75% confidence level based on the analysis used to
arrive at the estimated effective rates of return. This means that in
75% of the hypothetical market scenarios (with differing market
conditions) the amount saved meets or exceeds the required spending need
and in 25% of the market scenarios the savings are not able to fully
fund the spending need. The assumed asset allocation for the analysis
uses three asset classes and a generic target date asset allocation
appropriate for college savers. The analysis is then repeated for each
age assuming the hypothetical investor had started saving a flat, real
amount at birth and solves for the required assets at the current age to
meet the spending need with 75% confidence. Once complete, the analysis
illustrates that the college x factor is similar for all ages. In the
“average American” scenario the college x factor is approximately 2,000
4 College Board, Trends in College Pricing Report 2016 - includes tuition, fees, room and board
5 Fidelity Investments, Fidelity Investments College Savings Indicator, August 2016
6 Fidelity Investments, Fidelity Investments College Savings Indicator, August 2016