529 savings can pay for expenses other than tuition. (iStock )
A new study suggests Americans may be missing out on a key avenue for saving for college.
According to Edward Jones, half of adults saving for education are unaware of the benefits of a 529 savings plan, and of those, less than a quarter are using the financial tool to save for college. investigationAdditionally, only 25% know that these plans can be used to fund things other than higher education.
The biggest obstacle preventing more Americans from taking advantage of 529 plans is the misconception that you need more savings or income to open one. “A 529 education savings plan is an investment account that receives tax-advantaged benefits when used for the account beneficiary’s qualified education expenses,” the study states. Earnings grow tax-free, and distributions are free of federal taxes when used for qualified education expenses. Changes in federal and state laws have allowed 529 plans to be used for more purposes.
“Tax law changes over the past seven years have made 529 plans more convenient and easier to apply than ever before, and they can often be used tax- and penalty-free to fund post-secondary education, technology purchases, further education and more,” says Andy Esser, financial advisor at Edward Jones. “As a financial advisor and parent, I see firsthand the many benefits of 529 funds, regardless of what path a child chooses to take. Educating families about these benefits leads to more effective outcomes.”
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529 isn’t just for colleges
The survey found that 27% of Americans are considering saving for trade or technical school, compared with 22% who are considering saving for a traditional four-year college, but only 47% know they can fund trade or technical school through a 529 plan.
Plus, 529 savings can be used to cover room and board, a significant expense that sometimes isn’t covered by scholarships. Savers can also use the funds to pay off student loans. Any unused funds can be rolled over into the beneficiary’s Roth IRA starting in 2024, according to Edward Jones.
“Although one-third (32%) of Americans saving for their children’s education don’t know what a 529 plan is, the savings plan’s features resonate with many,” the survey states. “In fact, three in five Americans (61%) say the tax benefits have motivated them to join a plan.”
Other popular features that motivate Americans to consider a 529 plan include flexibility in managing their 529 account (58%) and the ability to use funds to pay for qualified education expenses (56%).”
If you have private student loans, you can reduce your monthly payments by refinancing to a lower interest rate. Visit Credible to speak with an expert and get your questions answered.
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How Americans pay for college
Surveys show that while parents are trending towards saving for education, 60% feel they aren’t saving enough to meet their future education expense goals. Here’s what Americans plan to do to reach their education savings goals:
- 35% use personal savings accounts
- 18% rely on scholarships
- 18% plan to use federal or state financial assistance
- 9% plan to take on a second job at school or university to help pay for tuition
Despite the many benefits of 529 plans, only 14% of people invest or plan to invest in a 529 plan as part of their education savings strategy.
“If you start saving from birth, about one-third of your college savings goal can come from your earnings,” said Mark Kantrowis, a nationally known expert on student financial aid. Recent Interviews According to a Financial Sense report, “If you wait until your child starts high school, you’ll only get about 10% of your income. But two-thirds of states offer a state income tax deduction for contributions to a state 529 plan, meaning you can get tax and financial aid benefits as a way to save for college.”
If your scholarships, grants, college savings, and federal aid don’t cover all of your education costs and you’re considering private student loans, comparing your options can help you plan better. Credible helps you compare fixed- and adjustable-rate private loan options from multiple lenders.
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