When President Barack Obama proposed eliminating a major tax advantage to 529 college savings plans last year, one of the primary reasons was to direct more tax breaks to middle-class families.
The proposal was withdrawn after an outcry from parents and lawmakers, but it raised an important question: Do the tax-advantaged college savings plans make sense for lower and middle class families?
The accounts grow tax-deferred and withdrawals are exempt from federal income tax when used for qualified education expenses.
Data show that those families who save in 529 and Coverdell accounts — another type of tax-advantaged college savings plan — tend to be wealthier, according to a 2012 Government Accountability Office report, with about three times the median income of families who do not have such accounts. But plan managers and state administrators say there are still plenty of families of lesser means using the plans.
Young Boozer, Alabama state treasurer and chairman of the College Savings Plans Network, points to the fact that while the average Alabama account size is about $17,000, the median account size is $6,500.
“If you look at our median balances in our accounts, it’ll tell you this is a program being used by wide range of people: A lot of people in middle income and maybe lower income,” he says.
Supporters say that even families without much disposable income can make use of 529 plans — and should, given the rising cost of college.
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“Families are struggling and having to make really tough decisions,” says Nancy Farmer, president of the Private College 529 Plan, a prepaid 529 plan option specifically for private colleges and universities.
But she says that even saving a little for college is better than nothing: “Every dollar you save is a dollar you aren’t going to have to borrow.”
While 529s have historically been marketed to financial planners, plan managers are pushing direct-sold accounts, which don’t require the help of a financial expert. They say they’re working to make the savings vehicle more visible and accessible to people of all income levels by lowering or eliminating a minimum investment, working with community groups and creating materials in Spanish to reach a broader demographic.
Cash-strapped families can take advantage of 529 college savings accounts in the following ways.
— Open an account: The minimum contribution to open an account is lower than it used to be, experts say. Most 529 plans require a contribution of only $25 — or in the case of Alabama, no money at all — to open an account.
“Contribution minimums for most plans are as low as $15 to $25, and recurring contributions from bank accounts or payroll direct deposits are also at that level,” says Peg Creonte, senior vice president of Ascensus College Savings, which is one of the largest 529 plan managers in the country with plans in 17 states. “If you think about it, for many that is saving about $1 a day.”
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— Contribute when you can: While experts often recommend the approach of making recurring, automatic payments into a 529 account, this isn’t a necessity.
“Families need to understand you don’t need to make payments on a regular basis,” Farmer says. “You can open an account and put money in this year, and maybe you don’t put any in next year.”
Greg Rivara, spokesman for the Illinois state treasurer, points out that just having a college savings account makes it more likely for a child to go to college.
“If we have families struggling to pay rent, to put food on table, it’s understandable that a 529 monthly installment might get skipped, but at least there’s something there, and that expectation has been set,” he says.
— Make milestones an opportunity to contribute: Diapers are expensive. If you have a toddler who no longer needs diapers, take that money — or a portion — and put it into college savings, Farmer says.
The start of kindergarten offers a similar opportunity, she says. Use some of the savings from day care or preschool and put it toward college savings. Other financial windfalls, such as a parent paying off student loans, a tax refund or a pay raise, could also be put into a 529.
Asking for money for college savings rather than traditional gifts can also be a good way to get started or add to accounts. Most 529 plan providers offer some sort of gifting capability, Creonte says.
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— Set a goal, but not necessarily 100 percent of college costs: The cost of college is overwhelming and that can cause some families to get discouraged about saving at all, Farmer says.
“I think some families throw in the towel,” Farmer says. “We continue to get the message out there: Save as much as you can. Very few people save 100 percent. Very few people pay 100 percent.”
Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.
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College Savings Plans May Make Sense for Cash-Strapped Families originally appeared on usnews.com
