529 Plans: An Underutilized Product

Now is the time for change.

According to the United States Department of Education, of the 73 million Americans under the age of eighteen, 43 million will enroll in a two- or four-year college program after graduating high school.

The ability to pay for college is a challenge for most Americans as the cost of education continues to rise. In an effort to meet this challenge and avoid crippling student loan debt, many families are looking for effective education savings solutions. In a recent blog entitled “529 Plans: The Best Way to Save for Education," we compared various methods available for education savings and showed why 529 Plans are superior to all others.

Despite the advantages 529 Plans have as a means for education savings, including tax incentives for contributions and the opportunity for tax-free growth, they are woefully underutilized.

Less than half of parents with children under the age of 18 are saving for their future education. The majority of these parents use a taxable savings vehicle, and most do not have a dedicated education savings account.1

So why aren’t more families saving for education? And among those that do save, why don't more invest in tax-efficient 529 Plans instead of low-yielding general savings vehicles?

The answers to these questions are a combination of factors including:

1. An inability to effectively plan

2. A lack of awareness of 529 Plans

3. The complexity involved when choosing investments
   

Although most families recognize the need to save for education, over 60% who don’t have a plan report that they are overwhelmed by the prospect of planning, don’t know how to plan, or don’t know where to get free information to help them plan.

This is unfortunate because those who have a plan save nearly twice as much as non-planners and report greater confidence in their ability to meet the burden of paying for education.

And while planning for education is important for success, choosing the right investment savings vehicle is equally important. Because Americans rank saving for their children’s education as a top household priority, the use of a dedicated education savings account like a 529 Plan should be part of an effective strategy. Yet among parents who save for education but don’t use a 529 Plan, over half report that they haven’t heard of them. That figure is even higher for non-savers with 57% saying they are unaware of 529 Plans.2

Among parents who save for education but don’t use a 529 Plan, 51% report that they haven’t heard of them. That figure is even higher for non-savers with 57% saying they are unaware of 529 Plans.

Even for parents who are aware of 529 Plans, their complexity often makes potential investors seek other solutions. There are more than one hundred 529 Plans and thousands of investment options to choose from. The tax incentives for contributions vary by state and comparing performance data and prices is a difficult task. With planning for education often overwhelming for parents, it's no wonder so many park their money in general savings accounts.

Recent advances in technology, accessible platforms, and the availability of information enable families to address all three obstacles identified. Through financial literacy and education, easy and digestible information on 529 plans, and access to savings plans, more families will be able to provide their children with debt-free education.

Now is the time for change.

1. Source: Sallie Mae: “How America Pays for College 2020” 2. Source: Sallie Mae: “How America Save for College 2018”