With tuition rising, families are being expected to pay more for college every year. Smart planning often involves setting aside money in a tax-advantaged educational account, such as a 529 Plan, yet 69 percent of Americans don't know what such a plan is, a new survey released by Edward Jones reveals.
Named after Section 529 of the Internal Revenue Code, which created these types of savings plans in 1996, the education savings plans are operated by state or educational institutions to help families set aside money for future college costs. Federal law provides special tax benefits to encourage the savings.
There was a 6 percent overall dip in awareness of 529 Plans in this year's Edward Jones survey compared with 2012, with awareness dropping by 11 percent for respondents ages 18 to 34. Awareness also lagged among those in the West and South, compared with the Northeast, and among lower-income adults more than wealthier respondents.
Last year, the Government Accountability Office reported that just 3 percent of American families use 529 Plans or other college-savings vehicles, such as Coverdell Education Savings Accounts. And families are actually saving less for college overall today than two years ago, according to another survey earlier this year from Sallie Mae. About half of parents with children younger than 18 are saving for college, while 60 percent did so in 2010.
To raise awareness about the importance of planning ahead for college, May 29 (5/29) has been declared National 529 College Savings Day.
Organizations, such as the College Savings Plans Network, a national nonprofit affiliated with the National Association of State Treasurers providing information about 529 Plans, are participating in the campaign to encourage families to set savings goals and research their options. Click here to see what your state is doing to observe the day, from hosting drawings for scholarships to unveiling new videos on savings.
Nearly every state has at least one 529 Plan, and families can invest out of state, even if their child is not going to attend school in that state. For example, a family living in Illinois can invest in a 529 sponsored by the state of Maryland even if the student doesn't enroll in a Maryland college.
Plans vary by state, and the website SavingforCollege.com regularly analyzes the investment performance of thousands of portfolios in order to come up with a ranking of plans by state. The most recent review in March has plans from South Dakota, California, and Michigan leading in the one-year performance ranking.
Although participation is still relatively low, interest is picking up. Total investment by American families reached a record level of $190.7 billion, a 15.7 percent increase from 2011, according to the College Savings Plan Network. The total number of 529 accounts increased 3.7 percent over the past 12 months, going from 10.7 million in December 2011 to 11.1 million as of December 2012. The average 529 account was 17,174 as of December 31, 2012, an 11.9 percent increase from the previous year.