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Financial Planning > College Planning > Saving for College

More Families Saving for College but Many Not Using 529 Plans

By Bernice Napach

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The rising, often astronomical, cost of paying for college appears to be driving families to save more for higher education.

According to a recent survey, “How America Saves for College 2016,” 57% of respondents are saving for their kids’ higher education, up from 48% in 2015 and near the 60% reported in 2010. Also a higher percentage of parents are saving for college than saving for retirement (56%) in 2016.

“The findings seem to correlate with the economy overall,” said Ellen Roberts, a spokesperson for Sallie Mae, which conducted the survey for the sixth consecutive year with Ipsos, an independent market research company. “Unemployment is down and the median income is up.”

The average college savings fund in 2016 totals $16,380, well above the $10,040 reported last year and still more than $15,346 reported in 2014.

(Related: 30 Best Paying College Majors: 2016 and College Planning: 7 Steps to Filing the FAFSA)

While more families are saving more money for college, and an increasing percentage are using 529 college savings plans—37% compared to 27% a year ago—the majority—61%—continue to use general savings accounts and 38% use checking accounts to save for college, even though both types of accounts have none of the tax benefits of 529 plans.

529 Plans: More Popular, but Don’t Dominate College Savings Plans

Assets in 529 plans grow tax free and can be withdrawn tax free, for federal purposes, so long as they’re used for qualified education expenses such as tuition. In addition, some states offer tax deductions or credits for 529 contributions. In contrast, funds held in savings and checking accounts reap few if any gains in today’s low yield market, and gains in savings accounts are taxable.

So why aren’t more families using 529 college savings accounts?

“A lack of awareness,” said Mark Kantrowitz, the publisher of Cappex, a free website that connects students with colleges and scholarships. “Employers tell employees about 401(k) plans, but no one is telling families uniformly about 529 plans.”

Indeed, according to the survey, when asked why they were not using a 529 plan to save for college, more than half of the parents surveyed said either they have never heard about such plans or weren’t sure if they had. Almost 60% of parents who weren’t saving for college were unaware about 529 plans.

“It’s sort of confounding,” said Roberts, the Sallie Mae spokesperson, about this lack of knowledge. “Some parents think they can’t afford these plans even though minimums can be as low as $25 a month. Also some parents don’t want to be constrained by not having the money available for other purposes.” (If 529 withdrawals are not used for qualified educational purposes, the investment gains are subject to federal taxes as well as a 10% penalty.)

What needs to happen to increase the use of 529 plans, said Kantrowitz, is for every single hospital to distribute information about 529 plans in addition to the formula packs they distribute to new parents. Not only would those families likely start saving early for college using a tax-advantaged account, but also their child would most likely enroll in college because those expectations exist.

Kantrowitz noted San Francisco is now offering college savings accounts to every kindergartener in the city school district, and Los Angeles is considering a similar type of program for its public school students.

Who’s Saving the Most for College?

Not surprisingly the Sallie Mae study found that parents in high-income households are more likely to use 529 plans than those in middle and low-income households (38% and 19%, respectively), and parents with a plan to save for college actually save more—about 76% more ($18,389 compared to $10,468).

But contrary to some conventional expectations, millennial parents are saving at a higher rate than Gen X or Baby Boomer parents— 65% versus 50% and 61% respectively—and more millennial parents have a college savings goal (66%) compared to Gen X parents (47%) and baby boomers (35%).

Only 9% of respondents reported that their savings goals were based on advice from a financial advisor.

Millennial parents are also more optimistic about their ability to save for their children’s college education, and they expect to shoulder a larger burden of that cost—39% compared to 33% for Gen Xers and 31% for boomers. Overall, about half the parents expect to share the burden of paying for college with their children, but only half of those parents have discussed that expectation with their children.

An even larger portion of parents—80%—said they were concerned about minimizing college costs, and two-thirds of them have discussed cost-savings measures such as choosing a public institution over a private one or living at home while attending college.  

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