Wealthy Kids Save More for College, Thanks to the IRS Billions of dollars are being socked away in an obscure federal college savings plan. Photographer: Jens Schlueter/Getty Images Assets in college savings plans named for an obscure section of the Internal Revenue Service code hit a new record this summer, totaling $266.2 billion. That’s up 5.1 percent from a year ago, when assets in the accounts stood at $253.2 billion. Individual balances in so-called 529 plans also hit a record average, at $20,975, up 3.1 percent for the year. These latest national figures, as of June 30, cover a total of 12.7 million tax-advantaged education savings accounts, according to the College Savings Plans Network. Unfortunately, that pot of money is only enough to cover an average one year’s worth of costs for an in-state student at a four-year public institution1, according to the College Board’s 2015 Trends in College Pricing. But every penny counts for students these days—even for the well-off, who the government says happen to benefit most from 529 plans. Source: College Savings Plans Network Assets in such plans compound free of federal—and sometimes state—income taxes. Distributions for qualified educational use also go untaxed. For households in the top tax bracket in particular, that’s a big benefit. While the number of these accounts is up 2 percent from a year ago, from 12.45 million, a hard number on just what percentage of U.S. families use them is hard to come by. Areport from the U.S. Government Accountability Office found that only 3 percent of all U.S. families used 529s in 2010, and that families with the plans had three times the median income of those without. Mary Morris, chair of the nonprofit College Savings Foundation, said surveys of households with children under the age of 18 indicate that closer to 15 percent of U.S. families make use of the plans.2 Meanwhile, a T. Rowe Price survey of some 2,000 parents saving for college last year found 31 percent use them. Far more parents in that survey said they saved for their child’s education using regular, low-interest savings accounts—coming in at more than 40 percent. When the parents were asked why they weren’t using a 529 plan, 28 percent said they had no idea what it was. The plans are established by states, which in many cases administer them with partners in the private sector. Increasingly, college savers are opening 529s directly with those states, though they can buy them through brokers and other financial advisers. those states. Robo-adviser Wealthfront recently announced that it’s offering a 529 plan for investors. It decided to work with Nevada, and while the company is waiving its 0.25 percent advisory fee on the first $10,000, Nevadans get a bigger perk: The fee is waived on their first $25,000. (There is also aninvestment management fee, which Wealthfront has said it expects will range from 0.18 percent to 0.21 percent.) Those fees are low, and overall fees in 529 plans have been coming down for years. As of 2015, the average asset-weighted fee was 0.74 percent, down from 0.79 percent a year earlier, according to Morningstar Inc. Watch Next: Why It's So Hard to Get Rid of Student Debt ... https://www.bloomberg.com/news/arti...-kids-save-more-for-college-thanks-to-the-irs
"Distributions for qualified educational use also go untaxed"...this is true, but the original contribution is AFTER tax dollars. These plans have been around for over a decade, nothing new. But, maybe to your point, less affluent families usually do not have the disposable income to contribute to the 529's, so the benefits skew towards the wealthy.
Only "the wealthy" pay full sticker price for college anyway. Everyone else gets a discount, so-called "financial aid."
"....obscure federal college savings plan." I was excited that maybe there was an actual obscure program I didn't know about when I read the headline, but not to be. I've known about 529 plans since before I had kids, I don't think there's anything "obscure" about them. If you do the math on the average 529 balance with the total in 529s it looks like around 12.7M families have invested in them, hardly what I'd call obscure.
Some States allow contributions as well as withdrawals to be exempt (i.e., deductible) from State income tax.
While this is technically true, any contributions that may qualify for State deductibility are very limited due to maximum income restrictions. On a practical level, many families that have the excess liquidity to contribute to a 529 plan would be at these income levels. That being said, the 529 plans are still one of the best vehicles for college savings. Unless of course, of your kid is 6 ft 10in, 285 lbs and runs a 4 sec 40. HA
Since the wealthy can take advantage of the best private school, primary and secondary education, many of their kids can qualify for means blind scholarships. (Yet another way fortune favors the wealthy.) In some states kids scoring sufficiently high on the SAT or ACT automatically qualify for tuition scholarships at State institutions. And they may even get room, board and books if they apply early enough. For example, kids scoring a >31 on the ACT can get a full ride scholarship to Mississippi's state schools. My son got a letter from the President of Ole Miss offering him a scholarship -- tuition, room, board and books, even though he had not applied there. (Sadly for me, he chose instead a very expensive school and only got partial tuition remission. Rats!) http://blog.prepscholar.com/79-colleges-with-full-ride-scholarships
SAT and ACT are de-facto IQ tests. Second-tier schools want high-IQ kids so they can upgrade their academics. Professors like teaching smart kids. "Wealthy" is irrelevant.