American families view a higher education as a critical investment in the future, but when it comes to planning and paying for that future, many do not consider tuition and associated costs when selecting a college. Many students and parents also fail to consider post-graduation income when deciding whether or how much to borrow to pay for college, according to a new national study of college-going families recently released by Gallup and Sallie Mae.

The study of more than 1,400 college students and parents, “How America Pays for College” provides the first mathematically representative composite picture of how American families paid for college last academic year. Parents, on average, footed the largest portion of the college tuition bill, through current income and savings (32 percent of the total amount paid) and borrowing (16 percent), while the average student covered 33 percent of the cost, through borrowing (23 percent) and their own income and savings (10 percent). Scholarships and grants covered another 15 percent of the higher education price tag, with the remaining 3 percent contributed by relatives and friends.

Many families, however, are missing out on the tax-advantaged benefits of college savings funds, such as a 529 college savings plan. Only 9 percent of families took advantage of these plans, while the most often used source was parents’ current income, with 38 percent of all families spending an average of $5,815 last school year.

How America pays for college also varies across income levels. Higher-income families paid much more from savings and income, and generally paid substantially more for college. Lower-income families received the most “gift aid,” such as scholarships and grants, while middle-income families borrowed the most, both in real dollars and as a percentage of their total college costs. The study suggests that middle-income families tend to borrow more to afford a higher-cost postsecondary institution.

Among other findings, the “How America Pays for College” study revealed:

• While nearly nine out of 10 families (89 percent) with annual income below $35,000 filled out the Free Application for Federal Student Aid (FAFSA), this number drops off considerably to only 76 percent for families with annual incomes between $35,000 and $50,000, and continues to fall as income rises. Overall one in four families did not complete a FAFSA.
• While credit card use for college expenses is relatively low in total (3 percent of students and 3 percent of parents charged part of their expenses) those who used credit cards to pay for college cited emergency cash flow problems as the No. 1 reason.
• Three percent of all families reported tapping home equity to contribute nearly $11,000 toward their child’s college education last year. Nearly three-quarters (73 percent) of these parents plan to borrow against home equity again to fund their child’s education for the coming school year.
• Slightly less than half (47 percent) of all families borrowed money to pay for college, and federal student loans were the top source for both students and parents.

In addition, while more than nine in 10 parents (94%) and students (96%) agreed that college is an investment in the future, parents of college students were worried about the cost of college and how the economy will affect their ability to pay for college. According to the study, the top concern, shared by 60 percent of parents, is that institutions will raise tuition, followed by 51 percent of parents expressing concern that loan rates will increase.

While 58 percent of families reported ruling out institutions because of cost at some point during the application process, another 42 percent of families did not limit their search based on cost—even after reviewing financial aid packages. Even more surprising, 70 percent of students and parents said a student’s expected post-graduation income either was not considered or did not make a difference on their borrowing decisions. The study also revealed that 49 percent of families limit their school options even before applying for admission and receiving a financial aid package.

Gallup and Sallie Mae conducted this study to help families make more informed decisions about how to pay for college. We have found that too few parents and students are focusing on the total cost of college, too many are ruling out college choices either too early or too late in the application process, not enough are using available college savings tools, and too many are borrowing without considering how they will pay. It is also troubling that one in four families do not complete the form, leaving grants, scholarships and low-cost loans on the table. We must help families be aware that decisions about college should not be made before understanding exactly how much financial aid is available.

Gallup and Sallie Mae plan to conduct the “How America Pays for College” study on an annual basis. The study will continue to help all stakeholders better understand how public policy, economic conditions and attitudes about the pursuit of a higher education evolve over time, and show how this evolution impacts the American family’s ability to pay for college.

The complete “How America Pays for College” survey is available for free download at http://www.salliemae.com/about/news_info/research/how_america_pays/