Experts report that boomer families are increasingly recognizing 529 college savings plans as a flexible and valuable medium for funding their children’s higher education. A new study suggests, however, that many families are falling far short of their college savings goals.
The study from OFI Private Investments, a subsidiary of OppenheimerFunds, compared the college financing knowledge and goals of “savers,” who are currently saving for college, vs. “future savers,” who say they plan to begin saving for college in the future.
OFI’s study, the Private Investments College Savings Confidence Index, measured consumers’ stated beliefs–as well as actual behaviors–to provide an annual grade and consistent year-to-year evaluation of college savings.
OFI says it developed the index in part to show the gap between what families hope to achieve and what their behavior is likely to accomplish.
In the benchmark first year of the Index, OFI assigned a “D” to savers and an “F” to future savers.
On average, both groups were in the young end of the boomer generation: around 40-years old, with children averaging around age 9, meaning college would be typically about 9 years away.
Notable differences between savers and future savers: 72% of savers had college degrees vs. 39% of future savers, and 72% of savers were employed full time vs. 58% of future savers. Average household income for savers was around $116,000, compared to $67,000 for future savers.
Only 32% of families who are currently saving for their child’s college education are confident they will achieve their savings goals, according to the study, conducted by Cogent Research, Cambridge, Mass. Among future savers, faith in their college savings was even worse, with just 14% expressing such confidence.
The index also showed that only 3% of U.S. households currently have enough saved to pay for college.
Despite the benefits of 529 college savings plans, OFI found vast numbers of Americans are not taking advantage of these tax-advantaged accounts, which were established under Section 529 of the Internal Revenue Code.
“Now is the time for state-sponsored plans and financial services firms to reconsider their approach and more aggressively educate the American consumer about 529 plans and other savings options,” advises Raquel Granahan, director of 529 College Savings Plans for OppenheimerFunds.
While savers clearly know more about their choices than do future savers, the index shows that both sides are not fully informed, especially about 529 savings plans. For example:
o Only 51% of savers currently use or intend to use a 529 plan.
o For savers, 529 plans account for only about one-fifth of actual college savings
o Just 40% of future savers intend to use a 529 plan.
o 56% of future savers claim that they could “not explain a 529 plan at all to a colleague or a friend.”
To meet the needs of both savers and future savers, OFI says its research suggests college savings plans in general and 529 plans in particular need to take these steps:
oOffer online enrollment.
oLower minimums investments.
oImprove plan website content and layout.
oOffer fewer investment choices combined with clear benefits.
For advisors, a key lesson is that the American public needs accurate and extensive education about college savings, Granahan says. Advisors have a willing audience, because for most boomers with children planning to go to college, college savings is a top priority. They also understand that it would take a committed effort to meet their goals, Granahan adds.
“Proper education, expert guidance and a variety of financially sound options represent the keys to improving the grades of both savers and future savers,” she says.
Savers and future savers differ significantly in 3 main areas: income, awareness of college savings options and confidence in their ability to meet college savings goals, according to the study.
Household income and education are not the only influences on savings habits. While current savers have more resources, the survey also showed they have a better awareness and understanding of the available college savings product options and their benefits.
Savers rank saving for college as their top investment priority, even greater than retirement, while future savers rank college savings slightly behind retirement savings.
Bruce Harrington, managing director of Cogent Research, says there is “an alarming lack of awareness of college savings options.” Families simply don’t know all the tools available and how to use them to achieve their college savings goals, he says.
An important lesson the data holds for advisors is that there is a major pool of liquid assets earmarked for college currently sitting in relatively weak savings vehicles such as checking and savings accounts.
Considering the aims, attitudes and views of U.S. households, this shows a real opportunity for advisors, OFI suggests. It offers these clues to the prospects for 529s:
o More than 90% of U.S. households with college-bound children expect to pay at least some of the required college tuition.
o 54% of future savers intend to start saving in the next 12 months.
o Savers who do not currently have a 529 plan have almost half of their savings in traditional savings accounts.