GAO report: Too few families investing in ‘529 college savings plans’

15 Dec

Many families start “529 Plans” to help with college expenses. A General Accounting Office (GAO) report finds that many families are not taking advantage of “529 Plans.” Saving for has some great information about “529 Plans.”

What is a 529 plan?

529 plan history

A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996.

State plans are OK for out of state colleges

529 Plans can be used to meet costs of qualified colleges nationwide. In most plans, your choice of school is not affected by the state your 529 savings plan is from. You can be a CA resident, invest in a VT plan and send your student to college in NC. Check to see if your institution is eligible under 529 rules.

Which states offer 529 plans?

Nearly every state now has at least one 529 plan available. It’s up to each state to decide whether it will offer a 529 plan (possibly more than one) and what it will look like, meaning 529 plans can differ from state to state. You should research the features and benefits of your plan before you invest, research state 529 plans and even compare between plans.

Tax Benefits

As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant. See the top 7 benefits of 529 plans.

Some states (but not all) offer tax incentives to investors as well. Research your state’s tax treatment.

More on Tax Benefits

Watch’s Chris Stack in video below (airing date March 31, 2011).

Types of 529 plans

529 plans are usually categorized as either prepaid or savings plans.

Savings Plans work much like a 401K or IRA by investing your contributions in mutual funds or similar investments. The plan will offer you several investment options from which to choose. Your account will go up or down in value based on the performance of the particular option you select.

Prepaid Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges.

Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the Private College 529 Plan is the only institution-sponsored 529 plan thus far).

Enrolling in a 529 plan

There are two ways to invest in a 529 plan.

  1. Directly with the 529 Plan manager. See a list of 529 plans.
  2. Through a financial advisor. Find an advisor in our Pro Directory. \

    Common questions

See, Where 529 Plans Are Failing

There are some good articles about whether a prepaid college plan is a good idea for your family

1. Baby Center’s Saving for College: Prepaid College Plans

2. Saving for Your Child’s Education

3. Is Your Prepaid College Plan Safe?

4. How to Use a 529 Plan to Improve College Savings

See, GAO Report: Too Few Families in U.S. Invest in 529 Plans

Here is the GAO summary:

What GAO Found

A small percentage of U.S. families saved in 529 plans in 2010, and those who did tended to be wealthier than others. According to the Survey of Consumer Finances (SCF), less than 3 percent of families saved in a 529 plan or Coverdell Education Savings Account (Coverdell)–a similar but less often used college savings vehicle also included in the SCF. While the economic downturn may have reduced income available for education savings, even among those families who considered saving for education a priority, fewer than 1 in 10 had a 529 plan (or Coverdell). Families with these accounts had about 25 times the median financial assets of those without. They also had about 3 times the median income and the percentage who had college degrees was about twice as high as for families without 529 plans (or Coverdells).

States offer consumers a variety of 529 plan features that, along with several other factors, can affect participation. Some of the most important features families consider when choosing a 529 plan are tax benefits, fees, and investment options, according to experts and state officials GAO interviewed. These features can vary across the state plans. For example, in July 2012, total annual asset-based fees ranged from 0 to 2.78 percent depending on the type of plan. 529 plan officials and experts GAO interviewed said participation is also affected by families’ ability to save, their awareness of 529 plans as a savings option, and the difficulty in choosing a plan given the amount of variation between plans. Selected states, however, have taken steps to address these barriers. For example, to address families’ ability to save, particularly for low-income families, some states have adopted plans that include less risky investments, have low minimum contributions, and match families’ contributions.

Savings in 529 plans affect financial aid similarly to a family’s other assets. For federal aid, a family’s assets affect how much it is expected to contribute to the cost of college. If the amount of those assets exceeds a certain threshold, then a percentage is expected to be used for college costs. For example, for students who are dependent on their parents, the percentage of parental assets, including savings in 529 plans, that the family may be expected to contribute ranges from 2.64 to 5.64 percent. Many states and selected institutions also treat 529 plan savings the same as other family assets. However, a few states provide them with special treatment, such as exempting those funds from their financial aid calculation.

Why GAO Did This Study

Paying for college is becoming more challenging, partly because of rising tuition rates. A college savings plan can be an option to help meet these costs. To encourage families to save for college, earnings from 529 plans–named after section 529 of the Internal Revenue Code–grow tax-deferred and are exempt from federal income tax when they are used for qualified higher education expenses. In fiscal year 2011, the Department of the Treasury estimated these plans represented $1.6 billion in forgone federal revenue. Managed by states, over one hundred 529 plan options were available to families nationwide as of July 2012. The number of 529 plan accounts and the amount invested in them has grown during the past decade. GAO was asked to describe (1) the percentage and characteristics of families enrolling in 529 plans, (2) plan features and other factors that affect participation in 529 plans, and (3) the extent to which savings in 529 plans affect financial aid awards. GAO analyzed government data, including the SCF. This survey’s 529 plan data are combined with Coverdells, so the SCF estimates used in the report include both 529 and Coverdell data. GAO also analyzed National Postsecondary Student Aid Study data; conducted interviews with federal and state officials, industry and academic experts, and state and institutional higher education officials; reviewed 529 plan and Department of Education documents; conducted a literature review; and reviewed relevant federal laws, regulations, and guidance.

What GAO Recommends

GAO is not making any recommendations in this report.

For more information, contact Michelle Sager, (202) 512-6806, .

Highlights (PDF, 1 page)

Jenny L. Phipps of offers additional suggestions in Cutting the Cost of College Incidentals:

18 ways to cut the cost of college incidentals



Read the bill carefully.


Don’t get caught in a feeing frenzy.


Beware too much health care.


Go on a dorm-dining diet.


Pay on time.


Know the financial aid bottom line.


Vet the class schedule.


Look for ways to get ahead.


Consider cheaper alternatives.
10. Transfer advance-placement credits.
11. Buy smart.
12. Decorate creatively.
13. Forget the phone.
14. Eat at home.
15. Buy used books.
16. Look for cheap travel.
17. Devise a money delivery system.
18. Be sure the price is worth it.

Congratulations on your acceptance into college. Now the real work begins.


Five Ways to Cut the Cost of College                           

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