College costs keep rising, and many parents haven't done much (or anything) to prepare for the expense. In fact, many parents remain completely unaware of an efficient way to save money for school that costs you less in taxes.
More than two-thirds (67%) of Americans do not know what a 529 plan is, according to a new study from Edward Jones, a financial services firm. That's actually a 5% increase from 2012, the first year the study was conducted.
Even those who have a basic understanding of 529 plans don't know all the facts. Among those who could identify a 529 plan as an education savings vehicle, nearly half (48%) did not know that money saved via a 529 plan can be used to pay for qualified K-12 expenses, not just for college.
"It's concerning to see that in nearly a decade, the number of individuals who do not understand or know what a 529 plan is has increased," said Edward Jones Principal Tim Burke in a press release. "What's more alarming is that parents with young children, those who stand to benefit the most from this type of savings plan, are not aware of its many advantages, not just for college, but for K-12 education expenses as well."
College saving may be a low priority
College tuition for an out-of-state school came in at $34,740 per year in 2017-2018, according to CollegeData.com. That's nearly $140,000 over four years, and the number will likely be higher, because tuition generally rises each year.
Of course, there are cheaper options, and a number of companies have started offering paid or low-cost tuition. Students can also go to state schools or community colleges. And for some of the pricier schools, $140,000 may not pay for three years let alone four, and a 529 -- which allows you to save money and not pay taxes on any gains if you use it for qualified educational expenses -- can be a cost-effective way to save for that huge charge.
It's important to note that 529 plans vary by state and also important to remember that you're not limited to using the one offered by the state you live in. The drawback is that money in a 529 plan only gets the benefit of not having to pay taxes on any earnings if it's used for qualified educational expenses. Edward Jones found that people are prioritizing other forms of saving. Here's how survey respondents ranked the importance of five different savings goals.
- Preparing for retirement (30%)
- Preparing for the unexpected (24%)
- Living in retirement (21%)
- Paying for education (8%)
- Planning for their estates or inheritances (5%)
Even for parents who have children under the age of 18, saving for college was not a priority. Only 8% of that group ranked college savings as their top goal.
What should you do?
You have to be balanced, and you should not ignore your own retirement or planning for the unexpected in favor of saving for college. You should, however, make sure you put something away to help with school, even if it's only a small amount.
As your kid gets older, it's important to discuss finances and options. Not every student needs to go to a high-priced school, and in many cases, it's a waste of money. Explore your options and look at the lower-cost choices your state offers.
College can be important, but there are other forms of education like trade schools that are better options for some people. Be open-minded and consider the financial shape your child will be in after graduating as much as you do the prestige/expense of the school he or she wants to go to.