Recently, I was reviewing Sallie Mae’s How America Saves for College 2014 and was surprised by some of the findings. It’s no secret that college is getting more expensive, so I anticipated that more parents would be saving money to help their children meet those rising costs. Surprisingly, fewer people are saving for college compared to just four years ago. In fact, only 51 percent of parents with children under the age of 18 have some form of college savings plan in place. And here’s another shocker. Those who do have a savings plan will probably fall very short of their anticipated goals, putting away less than $20,000 total for college on average. That barely makes a dent now, so it will cover even less for those attending college in the future.
How are families saving for college?
Most families are relying on savings accounts and CDs to build their college saving funds, but very few are taking advantage of 529 Plans (only 29 percent). I can understand why. First of all, many people assume that they are stuck with their state’s 529 Plan, which is false. Secondly, with over 100 available options, it can be intimidating trying to navigate through the different plans and decide which one will provide the best return on investment. It can be very confusing for those with limited investment knowledge, but that shouldn’t prevent them from starting a college savings plan. There are some great resources on the Internet, including Morningstar.com and SavingforCollege.com, which can help families explore their options and understand how 529 Plans work. I’ve also put together a quick overview of things parents should consider when researching their 529 Plan options.
What type of plans are available?
There are basically two types of 529 Plans, the Prepaid and College Savings plan. The Prepaid Plan allows families to basically pay for college at today’s tuition prices, but students are typically limited to their state’s public universities. There is another option, called the Independent 529 Plan, which allows families to prepay for private colleges, but not every college participates. One downside to the Prepaid Plan is that it does not grow as rapidly as other saving vehicles, such as mutual funds. The College Savings Plan, on the other hand, is an investment plan that gives families more flexibility, but also comes with more risk. Parents determine how their funds are invested, which will grow (or diminish) based on the stock market and current bond rates. Fees for this type of plan are also generally higher.
What should parents look for in a plan?
There are too many options to list here, but in general, parents should consider the following items when choosing a 529 Plan.
- Is the minimum monthly (or annual) contribution within their budget?
- Can other family members contribute to the plan?
- How easy is it to withdraw funds?
- Can ownership of the fund be transferred?
- What fees are charged?
- Does their state plan offer tax deductions or credits?
One advantage of a 529 Plan is that contributions and disbursements are tax-free, as long as the money is used for approved educational expenses. A few states, Rhode Island or North Dakota, even provide matching contributions for eligible participants. Parents can also increase their investment by using reward programs, such as UPromise. It may not add a substantial amount to their bottom line, but every dollar counts.
College isn’t getting any cheaper, so families need to start saving as soon as possible. I encourage parents with children under the age of 18 to meet with a financial adviser to discuss their options and to find a 529 Plan the works best for their family.