Not the most efficient way to save for college. (Image: Shutterstock)
American families are leaving more than an estimated $237 billion on the table by not investing their college savings in 529 plans.
Morningstar's new research paper "New Lessons About 529s" aims to provide new research on investor goals and behavior.
The paper uses survey data to explore
how and why American families are not taking advantage of 529 college-savings plans.
The paper points out that the single largest source of money that American families use to pay for college, after scholarships and grants, is loans. According to research by student-loan provider Sallie Mae, savings cover only 13.5% of the bill.
Education savings accounts — like 529 college savings plans — could help parents have more money available for college, and therefore borrow less. However, based on Morningstar's analysis of Sallie Mae data, only 16% of families saving for college use the 529.
The paper looked at a nationally representative sample of American households, the Survey of Consumer Finances, to examine what would happen if every household saving for college used 529s instead of other types of accounts.
The paper looked at a sample of American households with children younger than 18, drawn from the U.S. government's 2016 Survey of Consumer Finances. Morningstar then used data from Sallie Mae's 2018 " How America Saves for College" report to estimate how much each household in the survey has saved thus far for their children's education and where they are saving that money (529s, other investment accounts or checking/savings accounts).
Then, for each household, Morningstar considered an alternative scenario.
"What would happen if, at the birth of each child, the family had directed all education savings for their children into a 529 instead of other vehicles? How would the potential benefits of 529s translate into additional money for each family?" the paper asked.
