American families are saving for college big time in 529 plans, but they have a long way to go, according to 2013 year-end data released today by the College Savings Plans Network.
The average account size reached $19,584. The good news is that's a record high, but the bad news is it's barely enough for one year at a public four-year college. The College Board's Trends in College Pricing 2013 pegs the average in-state tuition and fees (including room and board) at public four-year colleges at $18,391 for 2013-2014.
CSPN aggregated data from 103 college 529 savings plans; they're offered by the District of Columbia and every state except Wyoming (it closed its plan due to low enrollment). The draw: money you contribute grows federal and state tax-free and comes out federal and state tax-free if used to pay college expenses. In all, there was a record $227 billion stashed in 11.6 million accounts—500,000 new accounts were opened last year. Some $22 billion went in in 2013; $14 billion went out.
How much have you saved for college? (Photo credit: 401(K) 2013)
Typically families choose age-based portfolios that favor stocks when the child is young and skew towards bonds and cash as the child nears college age. While total assets in 529 plans increased by 19.1% from year-end 2012 to year-end 2013, assets increased 14.7% net of contributions and distributions from the plans. By comparison, the S&P 500 rose 32.4%, and the Barclays Barclays Capital Aggregate Bond Index fell 2% in 2013.
While the average account size, at $19,584, won't pay all the bills, CSPN notes that it at least helps decrease reliance on student loans. And it's way up since the Great Recession. In 2007, the average account balance was nearly $15,000, then it dropped to $10,690 at year-end 2008.
Looking at distributions, CSPN found that 14% or 1.6 million accounts took a distribution to pay for college expenses. This represents approximately 8% of the total number of U.S. college students, suggesting that many more families could be benefitting from 529 plans.
The contributions data suggests stalled savings. Just over half of accounts (52%) were added to in 2013. It's a slight tick up from 49% of accounts receiving contributions in 2012, but until this year the percentage of accounts receiving contributions has consistently dropped from a high of 80% back in 2002. One reason for this is that older accounts that are now in the spend-down mode, but the economy is also to blame. Account owners make an initial contribution and then do so again only when they have money to spare, not necessarily every year.
Also in the early days of 529 plans, they were primarily being established by parents who make routine/monthly contributions. Now more grandparents and extended family members have opened accounts for relatives and are not making monthly or annual contributions. There are also a number of "dormant" accounts with small account balances that haven't been closed (so are technically "open") but are quite honestly, "not active," CSPN says.
Meanwhile state politicians are working to encourage more families to save for college with 529 plans. A California bill would create a 20% state tax credit, up to $500 a year, for contributions to California's Scholarshare College Savings Plan by state residents — for singles with incomes below $100,000 and married couples with incomes below $200,000.
Under bills passed in both the Wisconsin state Senate and Assembly and expected to soon be signed into law, anyone, not just family members of the child, could make tax-deductible contributions to an EdVest or Tomorrow's Scholar 529 Plan account. And the Wisconsin bills would allow annual increases to the current $3,000 maximum deduction for contributions based on inflation, as well as unlimited carryover of excess contributions for future deductions.
SavingforCollege.com has a state-by-state list of tax breaks here but be careful not to base your plan choice on the tax break alone as Janet Novack explains here. If you're in one of the 33 states (and D.C.) that offer a state tax break and you made 2013 contributions, remember to claim it on your tax return. Connecticut's CHET just sent out a blast email to account holders showing a bespectacled baby in front of a blackboard with the slogan, "Saving for college AND saving on taxes. BRILLIANT." with that reminder, and another to stay in the habit of saving for college by contributing in 2014.
The CSPN report is available here. CSPN also lets you compare plans by feature here.
See also:
The Forbes 2014 Tax Guide
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