Families Saving More for College but Not Necessarily With 529 Plans

(Related: Private College 529 Plan, Which Locks In Tuition, Is Expanding)

Earnings in 529 plans grow tax-free, and distributions from 529 plans and prepaid tuition plans are also tax-free so long as they're used for qualified education expenses. In addition, some states allow deductions for contributions to these plans. In contrast, funds held in savings accounts have little or no growth, given the still relatively low interest rates, and their withdrawals are taxable.

On the plus side of the latest Sallie Mae report — the seventh in a series that began in 2009 — parents are saving more money in 529 plans, $5,441 in 2018 versus $2,820 in 2016. The plans account for 30% of college savings, up from 17% in 2016, compared with 22% in general accounts in 2018.

Users of 520 plans "are either getting better returns on their investment than they had been (increasing savings), or this particular population is buckling down and depositing more, or both," says Marie O'Malley, Sallie Mae's senior director of consumer research.

(Related: How American Families Pay for College: 2017)

Another positive finding: Fewer parents are dipping into their retirement accounts to pay for college: 10% versus 20% in 2016 — and almost 70% now say they won't use retirement funds to pay for college, up from 60% in 2016.

Other highlights of the report:

• 39% of parents saving more for college attribute the increase to rising incomes
• More parents believe their children should contribute to paying for college: 59% in 2018 versus 51% in 2016, while fewer believe they, the parents, should bear sole responsibility for the costs: 26% versus 30% in 2016
• Fewer than half the parents (44%)  who believe their child should contribute to funding college have discussed this expectation with their child
• Many more parents discuss with their children the importance of earning scholarships (69%) and the price of college (67%)
• 67% of parents say their child is more likely to attend college if he or she knows some savings have been set aside for that purpose.
• Parents who have set a college savings goal are targeting $55,342 on average, which is about 11% less than the almost $62,000 targeted in 2016. Average college costs, in the meantime, rose 3.2% to 3.6% between the 2016-2017 academic year and 2017-2018 academic year for four-year public and nonprofit institutions.

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