Fidelity College Savings Indicator Finds Parents Are Projected to Meet Only 21 Percent of Future College Costs - Three Point Decrease from One Year Ago

2008-10-01 22:01:02 -

- Fidelity Investments Corporate Communications 617-563-5800 Fidelity Investments(R) today announced the results of its second annual College Savings Indicator (CSI), which found that parents are projected to meet only 21 percent of the total cost of their children's college education, a three percentage point decrease from last year. The CSI calculates how prepared parents are to pay for future college expenses, currently estimated at $120,000(1) for today's high school seniors.

According to parents surveyed, the current economic conditions are having a direct impact on their ability to save more for college, with 60 percent citing day-to-day expenses as a barrier. As a result, over one-third (34 percent) of these parents have either decreased the amount they are saving or have stopped saving completely for their children's future college education. In addition, 35 percent of all parents fear they will need to delay retirement to meet college expenses.

In addition to savings obstacles, parents are also facing decreasing funding options. For example, 24 percent of parents who are homeowners report that the recent decline in housing values will directly impact their ability to tap their home equity to fund college expenses. As a result, 14 percent of these parents anticipate taking a personal loan to help cover the shortfall. Furthermore, despite limited availability, significantly more parents this year (62 percent in 2008 vs. 53 percent in 2007) are planning to rely on student loans to help fund expenses. However, nearly one-third (32 percent) do not believe they will receive a loan in the amount they need.

"With college costs rising at twice the rate of inflation, it's critical for families to set a college savings goal early and invest regularly in a tax-advantaged account, such as a 529 plan, to meet expenses," said Joe Ciccariello, vice president of college planning, Fidelity Personal and Workplace Investing. "In fact, this year's Indicator found that parents who are investing in a 529 are on track to cover 40 percent of their children's college education expenses, double the preparedness level of parents nationwide."

Consider the following hypothetical scenario, which illustrates the benefits of saving in a 529 college savings account plan. If an average family, based on the respondent profile(2) of Fidelity's College Savings Indicator research, started to save when their child was born, and invested $2,000 annually in a 529 plan with an age-based allocation strategy, they would accrue nearly $67,000 in 18 years. If this family invested the same annual amount in a taxable account, they would potentially miss out on more than $7,000 in savings.

"The extra savings a family could realize by investing in a 529 plan, could not only help them be better prepared to meet rising college expenses, but could also reduce their reliance on other funding sources, such as student loans," said Ciccariello. "For example, to cover a $7,000 savings shortfall through a student loan today could end up costing a family more than $10,000 over the life of that loan."(3)

IMPORTANT: The projections or other information generated by the Fidelity College Planner tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Estimates of potential savings growth are based on 250 historical market simulations. The market return data used to generate the illustration is intended to provide you with a general idea of how an asset mix similar to that of age-based portfolios in a tax-deferred account, such as a 529 plan account have performed historically. Our analysis assumes a level of diversity within each asset class consistent with a market index benchmark that may differ from the diversity of your own portfolio. Other assumptions include the reinvestment of dividends and interest income, an annualized fee of .30% on the tax-deferred accounts, no management or service fees on custodial or taxable accounts, and no annual account maintenance fees on any accounts. If such expenses and fees had been included, the projected account balances would be lower. The tool assumes a federal income tax bracket of 25%. Unless otherwise known, the tool does not reflect the impact of state and local taxes; and therefore, the hypothetical returns of each account type may be lower. The tax treatment of each account may have a significant impact on the hypothetical results. Results generated by the tool are not intended to project or predict present or future value of actual investments or actual holdings, and they may vary with each use and over time. Periodic investment plans do not ensure a profit and do not protect against a loss in a declining market. Past performance is no guarantee of future results. Diversifying your portfolio does not ensure a profit or protect against a loss.

Parents Employing Savings and Funding Strategies to Meet Expenses

Even though today's parents are facing financial challenges, 60 percent have already started saving for future college expenses, recognizing the vital importance of providing their children with a college education. In fact, Fidelity's survey shows that half of parents have begun saving earlier, starting to put aside money towards college savings when their child was three years old versus four years old as seen in last year's findings. Thirty percent of parents are investing in a dedicated college savings account, like a 529 plan, and more than half (58 percent) of these parents are investing more strategically, opting for regularly scheduled contributions, instead of lump sum deposits coming from earned money or a gift.

"College graduates have the potential to earn more income and have more options available for employment, which is why it's critical for parents to remain committed to college savings today, so that their children may have a competitive advantage later in life," said Ciccariello.

In addition to saving earlier and more strategically, nearly three-quarters (72 percent) of parents are also seeking alternative strategies to meet rising college expenses. When asked specifically how they expect to bridge costs, 55 percent of parents will have their child work part-time while in school, 44 percent plan to have their child live at home and commute to college, 37 percent will encourage their child to attend a public school, and 23 percent of parents may ask their child to graduate in fewer semesters. These numbers all represent increases compared to last year's survey results.

Despite Savings Efforts, More Guidance and Education Needed

Three-quarters of parents (74 percent) did not seek any financial guidance or education about the savings options available to help meet future higher education expenses. The research also revealed the need for additional education and guidance on loans and other funding sources. For example, despite their reliance on student loans, 42 percent of parents surveyed said they are not knowledgeable when it comes to researching and applying for these loans.

A financial advisor can be a valuable asset in helping parents understand the many college savings options available to them and in establishing a sound investing strategy. In fact, 36 percent of parents said that their advisor proactively suggested opening and investing in a 529 plan account, up from 30 percent last year. Additionally, this year's College Savings Indicator found that those families working with financial advisors are on track to cover 31 percent of future college costs.

"Our research shows that 47 percent of those parents who work with a financial advisor have invested in a tax-advantaged dedicated college savings account," said Jeff Troutman, vice president of college planning, Fidelity Investments Institutional Services. "This reflects a tremendous opportunity and need for advisors to be proactive about incorporating college planning into their overall financial planning discussions with their clients."

College Planning Resources for Parents

To help families make better informed college planning decisions, Fidelity offers complimentary financial guidance online, through dedicated college planning phone representatives, and access to educational seminars at the firm's 126 Investor Centers across the country. In addition, parents can visit Fidelity's College Planning Web Portal on Fidelity.com to research and learn more about available college savings options, so they can make the right choices that may facilitate a successful college funding experience.

Fidelity's College Planning Web Portal features several tools and resources, including the new College Savings Evaluator. In a few short steps, Fidelity's College Savings Evaluator helps investors establish their college savings priorities, and identify the savings vehicle which may be right for them.

For those individuals for whom a 529 may be the right savings vehicle, Fidelity's College Planning Web Portal (www.fidelity.com/college) also hosts a 529 Plan Comparison Tool that allows investors to conduct a side-by-side review of the features and benefits of hundreds of college savings plans, and a 529 State Tax Deduction Calculator, which helps investors determine if there is a significant tax advantage to investing in the 529 plan offered in their state of residence.(4)

529 college savings plans also represent an opportunity for advisors to strengthen client relationships by incorporating it as part of a broader financial planning interaction. Fidelity provides advisors with 529 plan information, marketing support, and online planning tools such as the 529 State Tax Deduction Calculator and the College Savings Planning tool. For more information about Fidelity's 529 resources, advisors can visit advisor.fidelity.com or call Fidelity at 1-800-544-9999.

About the Fidelity College Savings Indicator

As part of the study, 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 towards financing their children's college expenses.

Using Fidelity's proprietary asset-liability modeling engine, the firm was able to calculate future college savings levels per household against anticipated college costs. The results provide insight into the financial challenges that lie ahead for many parents.

Data for the Indicator (number of children in household, time to matriculation, school type, current savings and expected future contributions) are collected by Research Data Technology, an independent research firm, through a national online survey of almost 3,000 parents nationwide with children aged 18 and younger who are expected to attend college; with household incomes of $30,000 a year or more; and are the financial decision makers in their household. College costs are sourced from the College Board's Trends in College Pricing 2007. Future assets per household are computed by Strategic Advisors, Inc. (a registered investment adviser and wholly owned subsidiary of FMR LLC). Within Fidelity's Asset-Liability model, Monte Carlo simulations are used to estimate future assets at a 75 percent confidence level.

About Fidelity Investments

Fidelity Investments is one of the world's largest providers of financial services, with custodied assets of more than $3.2 trillion, including managed assets of $1.5 trillion as of August 31, 2008. Fidelity offers investment management, retirement planning, brokerage, and human resources and benefits outsourcing services to 24 million individuals and institutions as well as through 5,500 financial intermediary firms. The firm is the largest mutual fund company in the United States, the No. 1 provider of workplace retirement savings plans, the largest mutual fund supermarket and a leading online brokerage firm. For more information about Fidelity Investments, visit www.fidelity.com.

About Fidelity Investments Institutional Services

Fidelity Investments Institutional Services Company provides investment management services through investment professionals at financial institutions nationwide, including wirehouses, regional and independent broker/dealers, banks, trust companies and insurance companies. The company offers Fidelity Advisor Funds(R), Variable Insurance Product (VIP) Portfolios, systematic investment plans, institutional money market funds and a comprehensive line of retirement products and services. Fidelity Investments Institutional Services Company's total assets under management were $301.2 billion as of August 31, 2008. For more information, advisors may visit advisor.fidelity.com.

As of August 31, 2008, Fidelity Investments manages more than $14 billion in assets and over 980,000 accounts across seven state-sponsored 529 Plans, all open to residents of any state. The UNIQUE College Investing Plan, the Fidelity Advisor 529 Plan, the ScholarShare(R) College Savings Plan, the ScholarShare(R) Advisor College Savings Plan, the U.Fund(R) College Investing Plan, the Delaware College Investment Plan and the Fidelity Arizona College Savings Plan are offered by the State of New Hampshire, the ScholarShare Investment Board, an agency of the state of California, MEFA, the State of Delaware, and the Arizona Commission for Postsecondary Education, respectively, and managed by Fidelity Investments. If you or the designated beneficiary are not a California, Massachusetts, New Hampshire, Delaware, or Arizona 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.

Fidelity, Fidelity Investments, and the Fidelity Investments & Pyramid Design logo are registered service marks of FMR LLC. The third party marks appearing herein are the property of their respective owners.

Please carefully consider each Plan's investment objectives, risks, charges and expenses before investing. For this and other information, call or write to Fidelity or visit fidelity.com for a free Fact Kit or request a free Offering Statement from your advisor or through advisor.fidelity.com. Read it carefully before you invest or send money. Fidelity Brokerage Services LLC, Member NYSE, SIPC 300 Puritan Way, Marlborough, MA 01752 Fidelity Investments Institutional Services Company, Inc. 82 Devonshire Street, Boston, MA 02109

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(1) Fidelity calculation based on the Trends in College Pricing: 2007, College Board's estimated total costs for an average 4-year college (private and public) beginning school year 2009-10.

(2) Assumptions: household income of $71,000, married filing jointly, and standard deduction with two children.

(3) Based on a Stafford Loan, assuming a 10-year repayment period with an interest of 6.8%

(4) The 529 Comparison tool and the 529 State Tax Deduction Calculator are maintained by an independent entity not affiliated with Fidelity Investments.

Current Economic Environment Impacting Parents' Ability to Stay on
Track; Yet Preparedness Level Doubles for those Saving in a 529 Plan