Parents may be tapped out when it comes to funding their children’s college education, a new report from student loan provider Sallie Mae indicates.

Parents cut the amount contributed through savings and income substantially last year, by 11 percent from the previous year, and by 32 percent from two years ago, according to the survey titled “How America Pays For College.”

“Two years ago, parents reached deeply into their pocketbooks to meet the higher costs of college,” the report says. “However, this level of spending proved unsustainable.”

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Colleges also reduced scholarships, indicating that they too may be feeling the pinch from a tough economy, according to Sallie Mae.

In response, students assumed a larger share through their own incomes, savings and loans.

Students from high-income families in particular increased their use of federal loans substantially — 27 percent used federal loans in 2012, up from 19 percent in 2011. Plus, the average federal loan amount rose substantially (55 percent) over the last five years, to $7,874 in 2012 from $5,075 in 2008.

The report shows how families are struggling to meet rising college costs.
More families are taking cost-saving measures, and cost has become a more important factor in picking a college.

According to the report, 69 percent of families eliminated college choices because of cost, the highest percentage since the survey started five years ago.

Virtually all families exercised cost-savings measures, including living at home (51 percent), adding a roommate (55 percent), and reducing spending by parents (50 percent) and students (66 percent).

More are opting for more affordable community colleges — 29 percent in 2012 compared with 23 percent two years ago.

In addition, parents are increasingly raiding their retirement funds to help pay for college education. Parents increased the average amount withdrawn from retirement account savings by 59 percent, from $4,102 in 2011 to $6,542 in 2012.

They also borrowed more from retirement accounts. The average amount of retirement account loans used to pay for education has increased since 2011, but is not as high as in 2010 when it was $6,901.

Many parents may not realize the harmful consequences of retirement account withdrawals, CNBC reports. The withdrawals may be counted as taxable income. Plus, families might reduce the student’s eligibility for financial aid.

“Between the tax impact and the reduction in aid eligibility, the family may net very little return on their investment,” Mark Kantrowitz, publisher of Fastweb.com, a free scholarship matching service, told CNBC. “It also sacrifices retirement funds.”

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