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Assets in 529 plans grow tax free and can be withdrawn tax free, for federal purposes, so long as they’re used for qualified education expenses such as tuition.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.