Many Americans have said they aren't saving enough for future education expenses, a recent survey said.
Fifty-five percent of Americans said they prioritized the need for advanced education and many said they planned to increase savings toward this goal despite the high inflation and interest rate environment, according to an Edward Jones survey.
While the cost of living has eased some since inflation hit a 40-year high last June, it has remained above the Federal Reserve's 2% target rate. April's consumer price index (CPI), a measure of inflation, rose 4.9% year-over-year, a slowdown from the 5% increase in March, according to the Bureau of Labor Statistics (BLS).
However, rising costs were why 44% of respondents said they didn't think they were putting away enough money for future education expenses, Edward Jones reported.
There are some tools that could ease the challenge of saving in a high-cost environment, according to Edward Jones. One tax advantaged option, the 529 plan, has fallen off the radar of most Americans, with only 34% of respondents identifying it as an education savings tool, the survey said.
"While it is great that Americans are prioritizing saving for education expenses, it's unfortunate that the awareness of 529 plans has declined substantially," Steve Rueschhoff, principal of managed investments and insurance at Edward Jones, said in a statement. "With changes to federal and state laws, 529 plans can now be used for more things, benefiting more Americans and their opportunities for education and advancement."
If you hold private student loans, you could consider refinancing them to a better interest rate to lower your monthly payments. You can visit Credible to compare options from different lenders and choose the one with the best rate for you.
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Aside from rising costs for everyday things, Americans have also had to deal with tuition inflation.
The average annual tuition inflation between 2000 and 2020 was 5.1% at public colleges and 3.9% at private colleges, according to data from the National Center for Education Statistics (NCES) reported by Best Colleges. Costs rose 4.7% per year at public two-year colleges and 3.1% at private two-year colleges.
"In the past 20 years, college tuition and fees have grown twice as fast as the consumer price index (CPI) — a measure of what people pay for market goods like food and gas and a proxy for inflation," Best Colleges said. "CPI inflation was 33% from September 2000-September 2020. Tuition inflation was 67%."
Students paying for college tuition with a federal student loan may also see their borrowing costs rise.
The Treasury Department plans to raise student loan interest rates for the 2023-2024 school year, according to the College Investor. Rates for undergraduate student loans will jump to 5.50% from 4.99% starting July 1st. Just three years ago, rates were below 3%.
These new rates will apply to new loans, not current ones. Federal borrowing rates are fixed for the life of the loan. Only private student loans offer a variable rate option.
"The half-point interest rate increases continue a trend that began at the start of the pandemic after interest rates reached a historic low," Mark Kantrowitz, a financial-aid expert said in a statement. "The increases in federal student loan interest rates were influenced by the Federal Reserve Board's attempts to control inflation by increasing interest rates."
The Fed has increased its key federal funds rate to more than 5% — a 16-year high — in an attempt to bring inflation down to a 2% target rate.
If you are interested in paying down your private student loan debt, a refinance could help you lower your interest rate and monthly payment. To see if this is the right option for you, contact Credible to speak to a student loan expert and get your questions answered.
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The most commonly used savings tools that Americans used to save for college have remained consistent regardless of the changes in interest rates, according to Edward Jones. These include:
There are more than 16 million open 529 accounts and over $411 billion has been saved as of December 31, 2022, according to College Savings Plan Network. Investors can withdraw funds from the plan tax-free to cover nearly any college expense.
Moreover, 529 plans have an additional advantage for savers because of Secure Act 2.0. Any unused funds can be rolled over into a Roth IRA for the beneficiary beginning in 2024, according to Edward Jones.
"Families and students have concerns about leftover funds being trapped in 529 accounts unless they take a nonqualified withdrawal and assume a penalty," a summary statement from the Senate Finance Committee said. "This has led to hesitating, delaying, or declining to fund 529s to levels needed to pay for the rising costs of education. Families who sacrifice and save in 529 accounts should not be punished with a tax and penalty years later if the beneficiary has found an alternative way to pay for their education."
If you have private student loans and don't qualify for federal debt relief, you could consider refinancing to lower your student loan payments. Contact Credible to speak to a student loan expert and get your questions answered.
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