More than four years into the recession, many Americans have started using credit cards and money from their savings to make ends meet, including education savings accounts like state-managed 529 plans, which are designed to help families pay for college themselves and avoid debt from student loans.

Overall, personal, retirement, and college savings are down across the country, a trend caused in large part by the housing crisis. Since their peak in 2006, home prices have fallen 33 percent, resulting in a staggering $7 trillion in household wealth losses and about 12 million homeowners who have mortgages worth more than their properties. As families compensate for losses by acquiring more credit card debt and raiding savings and retirement funds, more students are being forced to borrow more education loans to pay for college.

According to Mark Vitner, managing director and senior economist at Wells Fargo Securities, before the housing bust households were similarly spending more and taking on more debt but it was voluntary. Families believed then that their homes represented an adequate investment.

“When the stock market and the housing market were booming, we saw that a lot of people would take on more debt and save less. They felt the saving was being done for them,” Vitner said. “Today, the saving rate is falling out of necessity. Food and energy prices have risen and folks don’t have as much money to spend on the things that they would like.”

Now the personal savings rate has fallen back to its lowest level since the recession began in Dec. 2007. In November, the personal savings rate fell to 3.5 percent, down from 5.1 percent a year before, according to the U.S. Commerce Department. Currently, a third of 401(k) retirement savings account holders have outstanding loans borrowed from their accounts, a 20 percent increase among all 401(k) participants and a 60 percent increase among 401(k) participants with lower earnings. The vast majority of borrowers reported needing money for college or to pay off essential expenses like bills and car repairs (“U.S. Recovery at Risk as威而鋼
Americans Raid Savings,” Reuters, Jan. 17, 2012).

Money for College Is Increasingly Used to Pay Living Expenses

Popular state-managed 529 college savings plans were hit particularly hard by outflows in 2011. Assets in 529 plans fell more than 10 percent in the third quarter alone. Between July and September, 529 plans nationwide lost $354 million as parents withdrew money to help cover non-educational expenses. During the same period in 2010, 529 plans grew by $927 million.

According to investment firm Vanguard, parents of younger children are continuing to save “but they may be concerned about the economy and market conditions and have cut back a little.” Contributions to 529 plans managed by Vanguard dropped 1 percent in 2011 after climbing 17 percent from 2009 to 2010.

The decline in college savings is already causing an increase in the amount of education loans that students must borrow to pay for college. According to the Federal Reserve, household borrowing on student loans, credit cards, car loans, and other forms of installment debt jumped almost 10 percent from October to November, the biggest increase in a decade.

Overall, students are borrowing twice as much money for college as they did a decade ago, when adjusted for inflation, according to the College Board, and Americans owe more than $1 trillion on student loans, which is greater than the nation’s total outstanding credit card debt.