Surprising number of parents use retirement accounts to save for kids' college, study says

October 12, 2010

By Barbara Marquand | Money Rates Columnist

Almost a quarter of American parents who are saving for their children's college education make costly mistakes, such as using retirement accounts for education savings, according to a new national study conducted by Gallup and Sallie Mae.

"Without dedicated college savings plans or accounts that facilitate good distinct planning for both retirement and college, American families could be setting themselves up for coming up short on both important goals," the report states.

Saving for college is ranked almost as high of a priority as saving for retirement, according to the study, with 21 percent of parents ranking college savings as a top savings priority, versus 22 percent who rank saving for retirement as their top priority.

Retirement accounts hold the greatest share of college savings; 23 percent of the money that's set aside for college savings sits in parents' retirement accounts; 21 percent is held in investments. The rest of the savings is held in general savings accounts, which holds 14 percent of college funds, and 529 college savings plans, which holds 12 percent of funds set aside for college.

CDs, savings accounts most common college savings vehicles

Half of families use general savings accounts or certificates of deposit to save for college, and a third of families use investments, including stocks, mutual funds, money market accounts or bonds. A quarter of parents use 529 college savings plans and retirement accounts.

The average American family that has saved for college is projected to have accumulated $48,367 by the time their child reaches 18, according to the study.

Overall, three out of five parents of college-bound children have saved for their oldest child's college education, but the percentage rises sharply with income. Eighty-eight percent or more of parents with incomes above $100,000 have saved compared to 72 percent of parents with incomes of $50,000 to $100,000, 46 percent with incomes of $35,000 to $50,000 and 37 percent of parents with incomes under $35,000, the study says.

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