How Families Paid for College in the 2012-13 School Year

Every fall, Sallie Mae, the student loan servicer, releases a survey about the previous school year. Unlike most college students, the survey is focused on just one thing: how families pay for college.

The 2013 survey (covering the 2012-13 academic year) came out recently, and it shows that, as usual, students and their families wrangle together a bunch of sources to pay those college bills.

For the average family, the biggest source of college money (30%) is grants and scholarships. These aren’t loans and don’t need to be repaid.

[Read: Save On College With the American Opportunity Tax Credit]

I routinely speak with nervous parents who are worried about the cost of sending their smart kids to an elite college and don’t realize that those colleges, in part because of their terrifying price tags, are the most generous with grant aid to lower- and middle-income families.

(To be fair, sometimes I have this conversation with parents whose children are still in preschool, so maybe it’s unfair to expect them be too far along in the college search.)

The next-biggest pot of college money is parental income and savings (27%), followed by student loans (18%), student income and savings (11%), parent loans (9%), and finally relatives and friends (5%).

The typical family spent (grab your wallet) $21,178 on college.

It’s a big report, and the whole thing is worth reading, but I’d like to focus on two areas: 529 College Saving Plans and private student loans.

Revolution 529

According to the Sallie Mae survey, 17% of families used money from a 529 plan to pay for college. These plans have been around in their current form since 2001, and they’re too seldom used.

Last year, a report from the Government Accountability Office found that less than 3%of families have a 529 plan. Of course, some families aren’t saving for college.

Even among families that said saving for education was a priority, however, less than 10% had a 529.

[Read: Estimating the Cost of College Using a Net Price Calculator]

This is too bad, because 529s are one of the two best ways to save for college (I’ll get to the other in a minute).

You can withdraw money from them tax-free as long as it’s used for qualified education expenses, and you can change the beneficiary if you have money left over.

Grandparents can open their own 529 plan with their grandkids as a beneficiary, or deposit money into your plan.

Furthermore, many states offer an income tax deduction for contributing to a 529, which is like getting a 401(k) match: as close to free money as you’ll find short of a pirate treasure map.

I’ve written before about how to choose a 529, but it’s still too confusing, and many plans are still too expensive. Once you’ve chosen a plan, you have to select investment options inside it. Yuck.

Wherever there is financial confusion, people will take advantage of it, and sure enough, you can find all kinds of ill-conceived college savings schemes (such as combining college savings with life insurance) that should be avoided.

The only type of college savings method worth considering outside a 529 is Series I US Savings Bonds (I-bonds). Like 529 plans, they’re tax-free if used for college.

(In order to get the tax break, you have to own the bonds, not your kids.)

Unlike 529 plans, I-bonds don’t qualify for a state income tax deduction—but there’s also no penalty if you use the money for something other than college.

Even if you can’t afford to save for college yet, it’s worth opening a 529 just so you can mention it when Grandma asks what little Sally wants for her birthday.

Private loans (are watching you)

In the tradition of those anti-binge-drinking ads (“four out of five students at your college don’t drink to excess”), I should point out that 69% of families in the survey didn’t use a student loan to pay for college last year.

This understates the prevalence of student loans somewhat, because many students don’t take out loans until later in college or graduate school, after they’ve exhausted their savings, but still, be like the 69%.

[Read: 5 Ways Student Loans Can Hurt Middle Class Kids]

Other than Breaking Bad–style entrepreneurship, private loans are the last resort for paying for college. They carry higher interest rates than federal loans and have fewer protections.

In particular, they’re not eligible for the Income-Based Repayment program which reduces your payments if you hit a financial hardship.

(The same is true of PLUS parent loans, also usually a bad idea, since they represent a drag on parents’ retirement saving.)

But only 9% of families took out a private loan in 2012–13. Half of those families borrowed less than $5000, and half borrowed more.

What did they do with the money? Let Sallie Mae, a major servicer of private loans, tell you: “Private education loans appear to help families pay for higher-cost colleges.”

You’ll find more private loans at private colleges than public colleges, and more at four-year colleges than two-year community colleges.

But that’s not all. “Private education loan borrowers were also more open to exploring their college experience options.”

This is a nice way to say that private loans are used to pay for colleges that the families can’t actually afford, or as the report puts it, “Private education loan users were less likely to eliminate colleges from consideration due to cost[.]”

Finally (and yes, I’m cherry-picking these data points), “Families where a student used a private education loan are less likely to agree they have a contingency plan to pay for college should an emergency arise.”

If you can’t pay for a particular college without taking out a private loan, you can’t afford that college.

Is this a terrible thing? Of course not.

For middle- and working-class families, college range in price from relatively affordable to completely outrageous, and there is little or no evidence that choosing a more expensive or more prestigious undergraduate college will have any effect on your future job satisfaction or earnings.

Again, I recommend reading the whole report, which has plenty of other good stuff in it (including a section on how college students use credit cards).

I never thought I’d say this back when I used to send them a monthly check, but kudos to Sallie Mae.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.