Saving for College: Most Parents Flunk the 529 Test

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With student debt at $1 trillion and counting, and tuition rising 8% a year, it seems impossible that anyone would not know about the smartest college savings tool out there: the 529 plan. Alas, stunning numbers of Americans are in the dark.

A new survey from brokerage Edward Jones found that 62% have no knowledge of 529 college saving plans, which are tax-advantaged plans for education savings—akin to 401(k) plans for retirement. The Jones survey asked respondents to identify a 529 plan from a list of options like “life insurance” and, of course, “a college savings plan.” Most chose incorrectly and 14% gave up and said they did not know.

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Wealth plays a big role in awareness of 529 plans. Only 27% of those making less than $35,000 a year were able to identify a 529 plan, while 57% of those making between $75,000 and $100,000 and 62% making more than $100,000 got it right. This is not an unusual pattern when it comes to financial questions. But it’s a real shame in that 529 plans are generally a great tool for families of any means.

There is also far greater awareness among those with a college degree and, as you might expect, those with children. Still, a surprising number of parents do not know about 529 plans: Just 48% of those with children said they knew about 529 plans. Those with young children (under 13) had the greater awareness, with 52% correctly identifying a 529 plan; just 43% of those with kids aged 13 to 17 got it right.

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These numbers are startling in light of the raging debate over the cost of college and the value of college and how to deal with all those college loans. Early and effective use of a 529 plan should be a cornerstone of any parent’s college saving strategy. There are many reasons to save this way.

More than 60% of federal financial aid is loans, which must be repaid with interest and, on average, a year of in-state college tuition and fees costs $17,131—which rises to $24,942 when the money is borrowed and repaid over 10 years, estimates the College Savings Plans Network, a non-profit that promotes 529 savings. For many students, $1 borrowed often costs $2 to repay, CSPN says. Even modest 529 savings over 18 years can greatly reduce eventual education costs; some plans allow for contributions of just $15 a month. Meanwhile, these savings can be used in a variety of ways, including at community colleges and for technical training.

Look first to your state’s plan. That is where you are most likely to get the greatest tax savings. But there is great variety among state plans. You are eligible for any of them and can begin your search at collegesavings.org.