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Brown Center Chalkboard

Are middle-income families using the 529 education savings plans they fought for?

Nancy Farmer

It’s November and America’s high school seniors and college enrollment officers are busy with applications. While students are providing data and schools are reviewing it, families are asking one question of colleges: “How can we afford you”?

Why?

Because they have few answers, and fear they’ll be adding to the $1.2 trillion in student loan debt, a total greater than credit card balances or car loans.

College costs have risen faster than other prices and faster than stagnant family incomes, causing higher education to be something that people now have to pay for over time. According to the College Board, inflation-adjusted tuition for private, four-year colleges has risen about two and a half times in 30 years. Over the same time, costs at public, four-year universities more than tripled. 

Practically speaking, families can either save and earn interest to pay for college, or borrow and pay interest. Most families, for many reasons, will borrow. The portion of American families saving for college is actually declining. Noting the rapid escalation of college costs, many families have thrown in the towel on saving.

2010 2015
Families with children under 18 saving for college 60% 48%

Source: Sallie Mae “How America Saves for College” 2013,2015

In response to the declining savings rate, President Obama proposed eliminating the tax advantages of what I believe is the best way for many families to save for college – Section 529 plans. The administration’s rationale: 529 plans are used more often by the wealthy. It proposed other tax credits to help middle- and lower-income families pay for higher education.

Middle-income families flooded Congress with outrage, and headlines from coast to coast portrayed the proposal as an attack on the middle class. With this opposition, the White House dropped the idea days after the State of the Union. But while there may have been indignation over the idea of taxing 529 savings income, families aren’t heavily using them.

Overall, according to Sallie Mae data, only 27 percent of families are saving in a 529 plan. For middle income families ($35,000-$100,000) the proportion drops to 20 percent. Many families simply aren’t aware such accounts exist; but even among those parents who know of them, less than half are saving. A survey commissioned by Private College 529 Plan (conducted by ORC International) this spring found that about three‑quarters of parents of teens 13-17 knew what a 529 plan is, and only about one-third are using one. Another survey found even lower levels of awareness. Many surveys show that the most common college savings method is a general savings account, which earns almost no interest.

Who can help brighten this dismal picture?  Following are several possibilities:

Colleges and universities – Families researching colleges will find a “financial aid” section on the website of any institution. The school will describe the process for obtaining scholarships and loans, however, why not advocate various effective ways to save? Could the student recruiters, flooding middle schools, high schools, and operating booths at college fairs, present saving strategies? Remember, often families’ first question—even before “where to go”—is “how can we afford you”?

Employers:  Businesses are sensing competitive advantage in a variety of ways to improve employees’ work/life balance. A 2014 study by the Society of Human Resources Management found that 70 percent of HR professionals said employees’ personal finances impact their job performance. There are even efforts to help employees pay back student loans. Some are going a more proactive route, by launching voluntary 529 college savings initiatives.

Author

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Nancy Farmer

Nancy Farmer is President and Chief Executive Officer of Tuition Plan Consortium (TPC). TPC was formed in 2003 to establish a prepaid tuition 529 option designed specifically by and for private colleges and universities. The plan includes more than 280 private colleges and universities nationwide. Ms. Farmer previously was state treasurer of Missouri.

Financial advisors:  Although Sallie Mae finds that fewer than 25 percent of families say they go to financial advisors for information on saving for college, some in the advisory community see college planning and saving as an opportunity to build business. Client fears about college costs give advisors, who understand financial aid strategies, an opportunity to offer guidance that allows families to best use their resources.

Ultimately, a cultural shift is necessary to encourage families that it is worthwhile to plan and save for college for their children and grandchildren. Our own survey showed the neither parents nor teens saw student debt as the most serious economic issue related to college. But lack of savings reduces options for students when choosing a college and higher debt loads can be a drag on life choices after graduation. Regardless of exactly how those savings are invested, the next generation of college graduates will be better off as middle-income families anticipate and prepare for their children’s higher education.

Editor’s note: This blog post stems from a conversation in the comments thread of a Chalkboard post about nudges and student loans by Ben Castleman. Disclosure: Nancy Farmer is President and Chief Executive Officer of Tuition Plan Consortium (TPC). 

The Brown Center Chalkboard launched in January 2013 as a weekly series of new analyses of policy, research, and practice relevant to U.S. education.

In July 2015, the Chalkboard was re-launched as a Brookings blog in order to offer more frequent, timely, and diverse content. Contributors to both the original paper series and current blog are committed to bringing evidence to bear on the debates around education policy in America.

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