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National 529 College Savings Day Highlights Value of 529 Plans

It’s well established that a college education helps open the door to a better-paying career path. According to a 2014 report from the Pew Research Center, college graduates between the ages of 25 and 32 earn $17,500 more per year compared to those with only a high school education.

At the same time, college is costly. In 2013, researchers with the New York Federal Reserve found, tuition and fees for a bachelor’s degree came to almost $15,000 per year (and even higher for students attending more expensive private schools). And as the cost of a higher education continues to increase faster than inflation, those numbers will only grow.

For too many families, even those who qualify for financial aid like scholarships and grants that reduce the “sticker price” of a higher education, the numbers are daunting. In fact, a recent survey by the brokerage firm Edward Jones found that 83% of Americans fear they can’t cover the cost of a college education.

Which means that if you’re a parent, it’s time to get serious about saving for your child’s education. That’s the message of National 529 College Savings Day (May 29), which highlights the importance of saving for college and serves to raise public awareness of 529 college savings accounts. (Click here to learn about 529 events in your state on May 29).

Congress created these tax-advantaged accounts in 1996, so named for section 529 of the tax code, to allow families to save for a child’s (or other beneficiary’s) post-secondary education down the road. Each state administers its own 529 plan, which are open to all savers, although the tax benefits and certain other features differ by 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 invest in stock funds, bonds 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.

The current Congress has taken some significant steps to expand and strengthen 529 plans. In April, the Senate Finance Committee approved legislation that would:

  1. Allow 529 withdrawals to be spent on computer equipment for educational purposes;
  2. Allow a 529 beneficiary to re-deposit funds in the account after withdrawing from a course or school, without incurring a penalty; and
  3. Change outdated distribution aggregation requirements for plan administrators.

These steps are intended to make 529 plans more flexible and convenient for families saving for education, explained Sen. Chuck Grassley of Iowa, who championed the changes in the Finance Committee.

“These reforms will make it even more appealing for parents to use 529 college savings plans,” Grassley said. “The additions give more flexibility for using the tax-free savings. The more flexibility, the more people use something like this. The bill also sends the message to families that Congress supports this program and will fight efforts to get rid of it.”

That’s a positive step because too many families still are failing to take advantage of these savings vehicles. A recent survey by student loan provider Sallie Mae found that only about 27% of families are using 529 plans—suggesting that plan providers should step up their public awareness and marketing efforts.

The Sallie Mae study also found that fewer than half of parents are saving for college, and that those who are saving only have enough saved to pay for less than one year of higher education. These results underscore the need for more awareness of the importance of saving, particularly as student debt loads continue to skyrocket.

“Despite headlines focused on the increasingly high costs of college, we still see a significant number of Americans who aren’t aware of one of the most important long-term savings vehicles that can help minimize the impact that the cost of education has on families,” said Steve Seifert, principal at Edward Jones, on the release of his company’s college savings survey results.

While 529s may be an underused tool, they’re popular among those who take advantage of the savings opportunity, as the Obama administration learned earlier this year. The president’s proposal in his fiscal year 2016 budget to tax 529 savings led to a serious backlash.

The vocal and strenuous objections from middle-class savers and members of Congress convinced the president to withdraw this wrong-headed proposal that would have punished many middle class families who are counting on their 529 account to prepare for their kids’ college bills. (But be forewarned—bad ideas in Washington have a zombie-like way of coming back to life even after they’ve been seemingly put to rest. So don’t be surprised if policymakers resurrect the push to tax 529 accounts later).

As with all investing decisions, it’s a good idea to discuss 529 savings with an investment planner, financial 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 the cost continues to be a major concern, Americans still recognize the value of a college education – so finding ways to manage those costs becomes paramount in the process,” Seifert of Edward Jones said. “We need to remind them of the wide array of strategies that exist and help them put their goals into action through designing a plan that utilizes the appropriate tools in support of their savings goals.”

For more information on to 529 plans and saving for college, check out the College Savings Plan Network.