This Friday, May 29, is 529 National College Savings Day — a day to remind families about one of the best ways to save for college.
Although families have opened more than 11 million 529 plan accounts — with assets totaling $232 billion — about two-thirds of the American public still don't know what these plans are, according to a recent survey from Edward Jones, but they should.
Investments in 529 plans grow tax deferred and distributions are free from federal income taxes so long as the funds are used for qualified college costs such as tuition, room and board, mandatory fees and books. Contribution limits per account are high — often in the hundreds of thousands of dollars — but they vary by state and some states offer tax deductions for in-state or out-of-state contributions.
"Saving is better than borrowing," says Joseph Hurley, founder of Savingforcollege.com. "If you don't have enough saved up to pay for college, you and/or your child will likely have to borrow. Your overall outlay will be much less if you save rather than borrow… [and] high levels of student loans can be a difficult financial burden after graduation."
Saving for college with a 529 plan is "absolutely the first method" Thomas Bird, a managing director at Wells Fargo Advisors, considers when working with a client to fund college tuition. "With a 529 account, clients avoid capital gains on the growth of the account if assets are used for a qualified expense and they're able to put college savings on autopilot, scheduling money to be taken out of each paycheck, says Bird. "I wish that all parents would start a 529 when their kid is born," says Bird. "When you look at the average cost of college today, 18 years is not a long time to save."
Indeed, the current average cost for one year of tuition, fees and room and board is $19,000 at a public four-year college for in-state residents and $33,000 for out-of-state students, according to the College Board. The equivalent cost at a private college is $42,400.
Given those sums, it's no wonder that paying for college is the number one financial concern among parents in the U.S. A recent Gallup poll found that 73% of parents with children under 18 worry they won't have enough money to pay for their child's college education. That tops the 70% worried about having too few dollars to pay a huge medical bill due to a serious illness or the 68% worried about financing retirement.
Despite these worries, families aren't saving nearly as much for college as they might, and that will cost them later. The amount of money saved in 529 plans is only about a fifth of the $1.2 trillion in outstanding student debt.
