GAO Report: Too Few Families in U.S. Invest in 529 Plans

Although many parents look ahead with trepidation at the possibility that they might not be able to afford college tuition for their kids, a very small percentage of families around the United States actually prepare for the large tuition bills by setting aside money in college savings vehicles like Coverdell Education Savings Account or 529 plans.

In total, fewer than 3% of families put aside money in 529s, and those who did were often much wealthier than the average American family. While some of this can be blamed on the economic downturn, the reluctance to use 529s goes further than lack of funds. According to a report by the U.S. Government Accountability Office, even among parents who considered putting aside money for college, fewer than 10% used the plans to do so.

Families with these accounts had about 25 times the median financial assets of those without. They also had about 3 times the median income and the percentage who had college degrees was about twice as high as for families without 529 plans (or Coverdells).

Since how 529 plans are administered differs from state to state, families are left with a number of factors to consider when deciding whether opening such an account makes sense. According to tax and investment experts interviewed by the GAO, most families need to look at tax benefits, other investment options available and fees associated with the account prior to choosing to invest in one. Data shows that fees for 529 plans vary across the country from as low as 0 to as high as 2.87%.

However, chances that parents have a 529 is also affected by their ability to save money in general, as well as their awareness – or lack thereof — about the savings option. Those who are less financially savvy might be stymied by the number of options available and might feel unable to correctly choose the best one for their circumstances.

Savings in 529 plans affect financial aid similarly to a family’s other assets. For federal aid, a family’s assets affect how much it is expected to contribute to the cost of college. If the amount of those assets exceeds a certain threshold, then a percentage is expected to be used for college costs. For example, for students who are dependent on their parents, the percentage of parental assets, including savings in 529 plans, that the family may be expected to contribute ranges from 2.64 to 5.64 percent.

Although most states treat 529 plans as any other asset, several give them a preferential status by excluding them from asset calculations for the purposes of financial aid.

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