Need to Save for Your Kids’ College Expenses? Consider a 529 Plan
If you have (or plan to have) kids, are you prepared to pay for their college education? It’s a hard fact that, for most families, the cost of college is a daunting expense.
According to estimates by The College Board, combined tuition, fees and room and board can average more than $20,000 per year for a four-year degree at a public state university, and more than $45,000 for a private school. Those numbers will only increase as the cost of higher education continues to grow faster than inflation.
Even families who qualify for financial aid like scholarships and grants that reduce the “sticker price” of a higher education will likely find those figures anxiety-inducing.
At the same time, we know a college education helps open the door to a better-paying career path. Economists with the San Francisco Federal Reserve estimate that workers with a four-year degree will have out-earned high school degree holders by some $800,000 by the time they hit retirement, even after accounting for the costs of their additional education.
It means that if you’re hoping to give your kids the best opportunities, it’s time to get serious about putting money aside for college. That’s the message of National 529 College Savings Day (May 29), which serves to raise public awareness of 529 college savings accounts.
Congress created these tax-advantaged savings vehicles in 1996, so named for section 529 of the tax code, to allow families to save for future post-secondary education expenses for their children (or other designated beneficiaries). Since then, the 529 accounts ballooned in popularity, with more than $275 billion in assets invested nationwide by 2016, according to data compiled by the College Savings Plan Network.
Each state administers their own 529 plans, which are open to all savers. In addition, most states also allow savers to deduct contributions to a 529 on their state income tax returns. Consult with your financial professional or tax preparer for details about the relevant laws in your state.
There are two types of 529 plans: prepaid tuition plans, which act as a hedge against tuition inflation, and college savings plans, which allow a saver to chose from a range of investments, such as equity or bond mutual funds or other investments aimed at capital appreciation. The earnings on these plans are tax-deferred, and withdrawals are not taxed when used to pay for tuition and fees, books and other qualified higher education expenses.
In recent years, policymakers at both the state and federal levels have sought to expand and strengthen 529 plans, in an effort to encourage use of the accounts by more families who might benefit from these powerful savings tools.
The reality is that while these accounts have been available for over two decades, awareness is still lagging. In fact, a 2016 survey by financial services provider Edward Jones found that nearly three-quarters (72%) of Americans were unaware of what a 529 plan is. That jarring statistic suggests far more needs to be done to help families better understand the benefits.
“We must continue to teach individuals and families about the investments, like 529 college savings plans, that offer attractive and practical ways to save for future college expenses,” said Steve Seifert, principal at Edward Jones, on the release of his company’s college savings survey results. “Balancing multiple savings priorities on a month-by-month basis can be challenging, but we cannot skimp on one goal at the expense of another.”
An annual survey titled “How America Saves for College” conducted by education lender Sallie Mae notes that among parents saving for college, only 37% were making use of 529 accounts in 2016. Yet the same survey finds that 529 savers manage to sock away substantially more than those who save in basic savings and checking accounts:
Parents who use 529 plans or investment accounts to save for college have saved higher average amounts than those using other types of accounts. The average amount saved in a 529 plan is $7,534; in an investment account, it’s $7,448. Those saving in a general savings account have saved an average of $6,043. Certificate of Deposit users average the next highest amount saved, $5,004.
While 529s may still be an underused tool, they’re popular among those who take advantage of the savings opportunity. Just two years ago, a proposal in Washington to tax 529 college accounts were met with staunch resistance from middle class savers who were depending on their accounts to fund their kids’ college bills. That proposal was withdrawn, but be forewarned — bad ideas in Washington, like taxing college savings, have a way of coming back even after they’ve been seemingly put to rest. So don’t be surprised if policymakers resurrect the push to tax 529 accounts at a later time.
As with all investing decisions, and particularly those with specific tax implications, it’s a good idea to discuss 529 savings with an investment professional or tax advisor to ensure it’s the right vehicle for you. But if it’s a good fit for your savings needs, a 529 plan can be a powerful tool for helping to defray the rising cost of college.
“While most Americans agree that a college education is an important investment, they are not taking advantage of the tools that help make the most of their savings,” said Seifert of Edward Jones. “As the cost of college continues to increase, it’s especially critical that you do your homework on the investment options available to you. The 529 college savings plan can be a great fit for many families as they prepare for their children’s future.”
For more details on the benefits of 529s and answers to frequently asked questions about college savings, check out this March 2017 529 Report from the College Savings Plans Network
