529 savings can pay for more than just tuition costs. (iStock )
Americans may be missing out on an essential college savings tool, according to a recent survey.
Half of all adults saving for education don't know about the benefits of using a 529 savings plan, and less than a quarter of them are using this financial tool to save for college, according to the Edward Jones survey. Additionally, only 25% know that these plans can be used to fund more than just higher education.
The biggest obstacle preventing more Americans from using 529 plans is the misconception that they require more savings or income to open. "A 529 education savings plan is an investment account that offers tax benefits when used toward qualified education expenses for the account beneficiary," the survey said. Earnings grow tax-free, and distributions are federally tax-free when used for qualified education expenses. With changes to federal and state laws, 529 plans can now be used for more things.
"Thanks to tax law changes over the past seven years, 529 plans are more useful and applicable than ever, and can often be used tax-free and penalty-free for secondary schools, technology purchases to further education and much more," Andy Esser, an Edward Jones financial advisor said. "As a financial advisor and parent, I see first-hand the varying benefits of 529 funds – no matter what path a child may choose. Educating families on those benefits leads to more impactful results."
If you're concerned about college costs and are considering a private student loan, it can help to shop around for the best rate. You can visit Credible to learn more about private student loan options and get personalized rates from multiple lenders without dinging your credit score.
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529s are not just for college
More Americans (27%) are considering saving money for vocational or trade school compared to the 22% who are considering saving for the conventional four-year college path, the survey said. However, only 47% know 529 plans can finance vocational and trade schools.
Additionally, 529 savings can be put towards room and board, a considerable expense sometimes not covered by scholarships. Savers can also use these funds to repay student loans. Any unused funds can be rolled over into a Roth IRA for the beneficiary beginning in 2024, according to Edward Jones.
"Though one-third of Americans saving for a child's education (32%) do not know what a 529 plan is, the features of the savings plan resonate with many," the survey said. "In fact, three out of five Americans (61%) say the tax benefits make them more inclined to enroll in a plan.
Other popular features that made Americans more compelled to consider 529 plans include the flexibility to control their 529 accounts (58%) and using the money to pay for qualified education expenses (56%)."
If you hold private student loans, you could lower 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
The survey said parents are more likely to save for education, but 60% do not feel they're saving enough to reach their goals for future education expenses. Here's how Americans plan to reach their education savings goal:
- 35% said they use personal savings accounts
- 18% are relying on scholarships
- 18% plan to use federal or state financial aid
- 9% plan to get a second job at school or university for tuition benefits
Despite the numerous advantages 529 plans provide, only 14% have or plan to invest in one as part of their education savings strategy.
"If you start saving from birth, about a third of your college savings goal will come from the earnings," Mark Kantrowiz, a nationally recognized expert on student financial aid said in a recent interview with Financial Sense. "If you wait until your child enters high school, about 10% will come from the earnings. But there are also about two-thirds of the states that have state income tax breaks on your contributions to the state's 529 plan. So it's a tax advantage and financial aid advantage way of saving for college."
If scholarships, grants, college savings, and federal aid don't cover all your education costs, and you are considering a private student loan, comparing your options can help you plan better. Credible can help you compare fixed and variable-rate private loan options from multiple lenders.
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