Last Friday, May 29, we celebrated 529 National College Savings Day — a day to remind families about one of the best ways to save for college.
Although families have opened more than 11 million 529 plan accounts — with assets totaling $232 billion — about two-thirds of the American public still don’t know what these plans are, according to a recent survey from Edward Jones, but they should.
Investments in 529 plans grow tax deferred and distributions are free from federal income taxes so long as the funds are used for qualified college costs such as tuition, room and board, mandatory fees and books. Contribution limits per account are high — often in the hundreds of thousands of dollars — but they vary by state and some states offer tax deductions for in-state or out-of-state contributions.
“Saving is better than borrowing,” says Joseph Hurley, founder of Savingforcollege.com. “If you don’t have enough saved up to pay for college, you and/or your child will likely have to borrow. Your overall outlay will be much less if you save rather than borrow… [and] high levels of student loans can be a difficult financial burden after graduation.”
Saving for college with a 529 plan is “absolutely the first method“ Thomas Bird, a managing director at Wells Fargo Advisors, considers when working with a client to fund college tuition. “With a 529 account, clients avoid capital gains on the growth of the account if assets are used for a qualified expense and they’re able to put college savings on autopilot, scheduling money to be taken out of each paycheck. “I wish that all parents would start a 529 when their kid is born,” says Bird. “When you look at the average cost of college today, 18 years is not a long time to save.”
Indeed, the current average cost for one year of tuition, fees and room and board is $19,000 at a public four-year college for in-state residents and $33,000 for out-of-state students, according to the College Board. The equivalent cost at a private college is $42,400.
Given those sums, it’s no wonder that paying for college is the number one financial concern among parents in the U.S. A recent Gallup poll found that 73 percent of parents with children under 18 worry they won’t have enough money to pay for their child’s college education. That tops the 70 percent worried about having too few dollars to pay a huge medical bill due to a serious illness or the 68 percent worried about financing retirement.
Despite these worries, families aren’t saving nearly as much for college as they might, and that will cost them later. The amount of money saved in 529 plans is only about a fifth of the $1.2 trillion in outstanding student debt.
The average college savings per family is $10,040 — the lowest level in three years — and only about half of families who save for college use 529 plans, according to Sallie Mae’s “How America Saves for College 2015.” Those with the highest total average of college savings — $11,590 — tend to use 529 plans. About 50 percent of parents and students say they wished they had started saving for college sooner.
One innovation that could help families save more for college is a 529 offering where they work. A 2013 Sallie Mae study of parents with children under 18 found that 63 percent of parents said they would be motivated to save in a 529 plan if it were offered at work with an automatic payroll deduction. The percentage climbed to 78 percent if the employer offered a matching contribution, as many do for 401(k) plans.
“We see a big disconnect between employees and employers,” says Kris Spazafumo, vice president of Business Development and Investment Services at American Funds, which runs Virginia’s CollegeAmerica 529 plan, the nation’s largest. “Seventy percent of employees would be interested in saving through a 529 plan at work if it were offered but only about 8 percent of employers do,” says Spazafumo, referring to a 2013 report from Strategic Insight. The current percentage is still under 10 percent, according to Strategic Insight.
American Funds is working with financial advisors who are working with business owners to offer 529 plans at work, and Spazafumo is “quite hopeful more and more companies” will provide that benefit.
One of the companies that does offer a 529 plan is Dun & BradStreet. Its EdAhead program includes a company match for employee 529 plan contributions plus a corporate donation to the local public school system, based on the amount of employees’ 529 plan contributions at the nearby corporate office.
“Employer distribution of 529 plans is tricky,” says Marcos Cordero, the CEO of Savingforcollege.com. An employer operating in multiple states, for example, will “have a hard time harmonizing tax issues.”
Apart from the prospect of more employer-based plans, there have been some changes in 529 college savings plans, primarily lower fees, investment options, and technological innovations that make it easier to enroll in plans and gift contributions, says Cordero. Also, a bill is pending in Congress that would allow families to use 529 plan funds to purchase computers.