A new Gallup survey found that because of the economic crisis, 47 percent of parents are saving less or aren’t saving at all for their kids’ education. The survey was released in May by student-loan provider Sallie Mae.
“While not saving for that degree may have felt like a smart move while the stock market was crashing, the need to fund your kid’s college account has only grown. For the 2008-2009 school year, the average cost of attending a four-year public school for in-state residents — including tuition and room and board — rose 5.7% to $14,333, according to the College Board. The cost was up 5.6% to $34,132 for a private university. (These numbers aren’t adjusted for inflation.)”
“Meanwhile, the value of 529 college-savings accounts sank 21% last year, according to Boston consulting firm Financial Research, leaving families with far less tuition money than they had counted on.”
529s are college savings plans that work much like Roth IRAs. You contribute after-tax collars, but if the money is used for qualified purposes neither your contributions nor your investment income will be taxed by the federal government when it is withdrawn.
However, these plans get complicated because they are governed by states and each state handles the tax breaks and benefits differently.
“ The combination of differing rules and a cacophony of confusing investment options have made the plans tough to navigate and can discourage their use by less sophisticated savers, said Joseph Hurley, founder of SavingforCollege.com and author of ‘The Best Way to Save for College: A Complete Guide to 529 Plans.’ ”
“Only about 5% of middle-income filers use the accounts, according to Treasury Secretary Timothy F. Geithner, even though the tax breaks can make saving through these plans vastly more lucrative.”
“They are a hit among high-income filers, Geithner added. Roughly one-third of top earners have a 529 account. Roughly 11 million accounts have been opened since the federal government gave them tax exemptions in 2002, and they now account for about $100 billion in savings, according to the College Savings Plan Network in Lexington, Ky.”
The Obama administration through a vice presidential task force has made recommendations to make the plans easier for Middle Class families to use. The article says three of the changes have been well received (although it doesn’t detail them) but the other two are controversial.
The first recommendation suggests that each plan offer at least one cheap and easy, hands-off investment plan for parents – which seems to make sense. I’m not clear why that would be controversial.
The other suggestion is to eliminate “home state bias” to make it easier for parents to invest in out-of state 529 funds.
Also here is a link to The Wall Street Journal article, which explains and examines some different options for saving for college such as:
The 529 College Savings Plans
The 529 Prepaid Tuition Plans
Uniform Gift to Minors Act and Uniform Transfer to Minors Act
And finally here are links to two college calculators:
So are you in the 47 percent who have either cut back savings or are not saving at all for college? What is your plan if you are not saving now? If you are saving now, how are you investing? What is your plan? What resources have you found useful?