College hat, diploma and money

As education costs in the U.S. continue to rise, just 29% of Americans in a recent survey correctly identified a 529 plan as an education savings tool, down three percentage points from the 2017 survey, Edward Jones reported Monday.

“It’s concerning to see the percentage of individuals who still don’t know what a 529 plan is or understand its usefulness in preparing to tackle education expenses,” Danae Domian, an Edward Jones principal, said in a statement. “There’s a misperception that only parents can establish these plans. But in reality, any person can set up a plan for any student.”

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The survey results came from 1,004 landline and cell phone interviews of U.S. adults conducted mid-April by ORC International’s CARAVAN Omnibus Services.

Several factors, including respondents’ age, influenced respondents’ awareness of 529 plans, according to the survey. Thirty-five percent of Gen Xers correctly identified 529s, compared with 27% of millennials.

In addition, 529 awareness increased with household income. Fifty-two percent of individuals with a household income of $100,000 or more correctly identified a 529 plan, versus just 17% of those with less than $35,000.

So, how do Americans save for education?

The survey results showed that 43% of respondents used, or planned to use, their personal savings to pay for higher education expenses. Thirty-three percent said they would depend on scholarships, 31% on federal or state financial aid and 20% on private student loans.

Placing dead last were 529 plans, with a mere 13% of respondents saying they would use that strategy.

The survey uncovered some grim findings about how much individuals are saving — or not saving — toward future education expenses. On average, 50% of respondents said they were saving anything on an annual basis.

That figure dropped to 41% for individuals with children under 13.

“As education costs continue to rise,” Domian said, “beginning to save early on with a mix of strategies will be paramount in ensuring you’re prepared to handle higher education expenses and aren’t derailing other financial obligations, like your retirement, in the process.”

Tax Law’s Effect on 529 Plans

Of those survey respondents who correctly identified a 529 plan, 65% said that they were not more likely to take out a plan given the changes from the recently passed tax overhaul. Further, 53% of those with children under the age of 13 said the same thing.

“Prior to the recently approved tax law, 529 plans could be used only on qualified higher education expenses,” Kyle Andersen, a principal at Edward Jones responsible for education savings plans, said in the statement.

Anderson said up to $10,000 per year per beneficiary can now be used toward qualified tuition expenses for children in elementary and secondary schools without incurring federal income taxes.

The new tax law also allows families to roll over funds saved in a 529 plan to an ABLE account for the disabled.

“Now may be an opportune time to take advantage of the changing law, however investors should be mindful of how their state of residence may adopt the changing law from a state tax incentive and benefits perspective,” Andersen said.

Some financial advisory clients may want to put more of their cash in 529 plan accounts, and less in other types of accounts, according to one expert.

Edward Jones noted that not every state will recognize elementary and secondary tuition expenses as qualified education expenses. It encouraged investors to consult with the plan sponsor and a qualified tax advisor to understand the state tax incentives and state tax consequences of using 529 plan funds.

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