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Small Fraction of Families Save for College With 529 Plans

Despite the tax advantages of 529 plans or Coverdell Education Savings Accounts, just 3 percent of all American families use the college-savings vehicles. Of the one-quarter of families who expect major education expenses in five to 10 years, the figure bumps up to 7 percent.

On Thursday, the Government Accounting Office issued a report about the use of 529 plans and Coverdells, including results of a 2010 Survey of Consumer Finances (SCF) that showed few Americans take advantage of these much-promoted college-savings tools. Those who do tend to be wealthier than others—with about three times the median income of families without these accounts.

The 529 plans (named after section 529 of the Internal Revenue Code) are a state-sponsored investment or savings vehicle whose purpose is to encourage people to save for college. Contributions to 529 plans are made with after-tax dollars and are not deductible for federal tax purposes.

Managed by states, there are more than 100 different 529 plan options available to families as of July 2012.

The GAO report includes both 529 and Coverdell data, since both were combined in the SCF survey.

Coverdells are also designed to encourage college savings, but are not sponsored by individual states.The contributions (maximum of $2,000 a year) are not deductible, but the money in the account can grow tax-free until it is distributed for education expenses.

The number of 529 plan accounts has increased substantially since the plans were granted expanded federal tax advantages in 2001. Americans had $19.4 billion in assets in 529 plans in 2001 and have invested $167 billion a decade later.

For families who did invest in 529 plans or Coverdells, their median asset value was about $413,500, which is about twenty-five times the median financial asset value for families without 529 plans or Coverdells (about $15,400). Families who used these plans were twice as likely to include someone with a college degree compared with those without.

In fiscal year 2011, the Department of the Treasury estimated these plans represented $1.6 billion in forgone federal revenue.

In concluding the report, the GAO says it is not clear whether the money on 529 plans "strategically targets limited federal resources." Families with less income and who are uncertain about whether their children will attend college may have less incentive to invest resources in 529 plans than in other forms of savings. The tax benefits attractive to a higher-income family, do not offer as much benefit to a family with lower tax liability, the report notes.

While no formal recommendations are made in this report, the GAO suggests that Congress review 529 plans, along with the billions in educational aid given through tax expenditures, tax credits, and tax deductions, to determine whether this program is meeting its goals.

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