How Much Has the Average American Saved for College?

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A student chants slogans as he attends a demonstration calling for lower tuition at Hunter College November 12, 2015. Carlo Allegri/Reuters

This article originally appeared on the Motley Fool.

With college prices at an all-time high, more and more families are saving up to help chip away at those costs. According to Sallie Mae's latest national study, 57 percent of American parents are currently saving for college—a figure that's up 9 percentage points from the previous year.

So just how much is the average American saving for college? According to Sallie Mae, the average family has socked away $16,380, with 37 percent of savers using tools such as 529 plans to help meet their goals.

Fidelity's numbers are a bit different—and actually a bit more promising. The investment giant estimates that 72 percent of families are now saving for college, with 41 percent taking advantage of 529 plans. And according to the College Savings Plan Network, the average family with a 529 has a balance of close to $21,000, which is actually a record high. But while those numbers may sound promising, the average American hoping to make a more sizable dent in those college bills still has some serious catching up to do.

The costs just keep climbing

With college expenses rising faster than inflation, even strong savers struggle to bear the entire cost of higher education. Here's what college tuition costs, on average, for the 2015-16 school year:

  • $9,410 for a public four-year in-state college;
  • $23,893 for a public four-year out-of-state school;
  • $32,405 for a private nonprofit four-year college.

But as we all know, tuition doesn't always tell the whole story. Here's an estimate of what the entire college package cost for the 2015-16 school year, from tuition to fees to room and board:

  • $19,548 for a public four-year in-state college;
  • $34,031 for a public four-year out-of-state college;
  • $43,921 for a private nonprofit four-year college.

This means that the average American family with $16,380 saved for college couldn't even cover a full year of tuition, fees and room and board at a public four-year in-state school. Furthermore, the average saver using a 529 plan only has enough money to pay for about a year at a public in-state college, when you consider the whole package.

But there's a silver lining here, especially if college isn't quite around the corner. If you commit to saving consistently and employ smart strategies, you can grow that balance so that when college does roll around, you'll be in a stronger position to foot the bill.

Standard savings accounts are a poor choice for families hoping to pay for college, just as they're a bad place to house your retirement fund. The problem with savings accounts is that they offer an extremely low return compared to most other investment options. In fact, the only thing they really have going for them is that they're probably the safest option out there. Unless you've socked away more than $250,000 per depositor, you don't risk losing your principal when you stick your money in a savings account. What you do risk losing out on, however, is investment growth.

The average savings account today pays roughly 1 percent interest. A 529 plan, by contrast, might easily give you a 5 percent return even when you factor in the fees that come along with it. Let's say you manage to save $200 a month over the course of 10 years. At 1 percent interest, your ending balance will be about $25,000. But if you invest in a 529 plan that generates an average annual 5 percent return, in 10 years, you'll have $30,000.

If you're not sold on a 529, there are several alternatives to consider. Municipal bonds, for example, are popular among some savers, because they typically come with a relatively small amount of risk and offer tax-free interest. You might also consider opening up a Roth IRA, which can double as a retirement and college-savings tool, if you meet the income requirements to do so.

Another way to increase your chances of meeting your college savings goal is to start putting money away as early as possible—perhaps before your children are even born. Imagine you're able to set aside $200 a month for college. Here's what your ending balance might look like depending on how early you start:

  • 5 years of saving: $13,000 balance (at 5% growth annually);
  • 10 years of saving: $30,000 balance;
  • 15 years of saving: $52,000 balance;
  • 18 years of saving: $67,000 balance.
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Uncommon Knowledge

Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.

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Maurie Backman

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