NEW YORK (MainStreet) —With higher education costs soaring and parents and their college-bound children more worried than ever about falling into debt, so-called 529 saving plans are seeing a slow, but steady, growth among those planning for the future.
“As college costs continue to rise, families are growing more and more aware that saving for college can ease the burden of student loan debt,” said Michael Fitzgerald, College Savings Plans Network chair and State Treasurer of Iowa. “Families are learning that by planning ahead, parents, extended family members and friends can contribute to a loved one’s education.”
The 529 plans offer parents the chance to receive investment gains that are tax free — assuming the funds are used for higher education expenses — and many states that run the plans also grant a tax credit or deduction for contributions to the savings plan.
According to a recent report by Fitzgerald’s group, total investment by families in 529 plans reached a record level of $190.7 billion in 2012 — a nearly 16 % increase from 2011, when assets were nearly $165 billion. Total number of 529 accounts also rose nearly 4%, with 11.1 million as of December 2012.
A similar report released in March by the non-profit College Savings Foundation, showed comparable results of total assets of 529 plans rising nearly 17% from 2011.
“Obviously families are seeing the importance of saving for education and starting it early,” said Roger Michaud, College Savings Foundation chair.
Michaud said one reason 529 plans have continued to gain in popularity among those looking to save for their kids’ future is the uptick the market has seen in the last four years.
“No doubt the market rebounding has helped.” Michaud said. “People are feeling more optimistic and are feeling more confident.”
Kal Chany, author of Paying For College Without Going Broke, said the growth of such plans typically mirrors the markets.
“These plans declined in popularity when the market crashed,” said Chany, founder of the private firm Campus Consultants. “People were concerned about their savings, maybe not so much planning for their kids’ college. Now that the markets are doing well again, these accounts are getting infused with money.”
Despite the health of the market and the increase in 529 plans, still only slightly more than one quarter — 27% — of parents who are saving for college use a 529 plan, according to a recent Sallie Mae survey. The same survey said only 37% of parents saving for college even had heard of a 529 savings plan.
“There’s certainly an untapped market out there,” Michaud said.
There likely is a larger market out there for 529 plans, considering more parents save for college using general funds or CDs — about 42% — and therefore are missing the tax incentives offered by a 529.
Chany, however, adds there are things to be careful about when using 529 plans which can affect a student when applying for financial aid — such as making sure a parent-owned plan is correctly reported as a parental asset and not as that of the student. Chany also added plans owned by relatives — such as grandparents — may be considered a student’s income after the first year and have a “chilling” effect on their financial aid.
“The best way is certainly for the parent to own the account,” Michaud said.
Despite their low profile, 529 fund experts see only more growth for such plans — which saw contributions exceed $21.2 billion in 2012.
“Our data indicates that total contributions and number of accounts continue to grow at ever increasing rates,” said Fitzgerald from the College Savings Plans Network. “We also found that positive market returns were a factor in the record amount currently being saved in 529 plans. We anticipate that these trends will continue into the future.”
Also see:How to Minimize Student Loan Debt