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Studies show 529 plans help amid families' struggle to save

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By Charles Paikert

September 20, 2009 6:01 am ET

A trio of reports released last week found a few bright spots for families using Section 529 college savings plans in an otherwise dismal college savings landscape.

Parents who use a 529 plan expect their savings to cover 36% of their children's future college costs, according to Fidelity Investments' annual “College Savings Indicator” study.

But among the 2,300 parents surveyed — which included those with and without 529 plans — there is the belief that they will be able to cover just 11% of the total cost of their children's college education, down from 15% last year. Thirty-two percent of those surveyed said they use 529 plans, up from 30% last year, the Fidelity survey found.

Indeed, 529 plans are also gaining popularity among families who have younger children, according to “How America Saves for College,” an annual study by Sallie Mae, a leading student lender.

One-third of parents who are saving for college use 529 plans, Sallie Mae found. Of parents with children under 7, 43% are contributing to the plans, compared with just 20% of parents with teenagers.

“The State of College Savings” survey of 800 parents, conducted by the College Savings Foundation, also underscores the effectiveness of 529 plans.

Parents who own 529 accounts are the most successful group in saving for college, the foundation found. Nearly two-thirds (61%) of parents with 529 plans said that they have saved more than $5,000 per child, compared with just 22% of parents who don't have a 529 plan, according to the survey.

Overall, however, the recession has clearly taken a toll on college savings. Less than a third of American families (29%) are on track to reach their savings goal for college, according to the Sallie Mae survey.

Families are saving an average of $2,676 for college annually, or 3.6% of their annual income, according to the study, which was based on a survey of 1,200 parents of children under 18 taken by The Gallup Organization.

But the study estimates that parents need to save an average of 5.7% of income annually to meet their savings goal by the time their child goes to college.

What's more, parents' confidence in their ability to save for college has sharply declined over the past year, as they have saved less and relied more on grants and student loans, according to the CSF study.

Parents who said that they are “not very confident” that they will reach their college savings goals jumped to 44%, compared with 31% last year. One-third of the parents that the foundation surveyed said that they are saving less for college this year than last, and 41% said that they have saved nothing at all during the past year.

Nearly half (47%) of parents surveyed said that they expect to use student loans to pay for college, up from 37% last year. Parents who said that they expect financial aid also rose to 73% this year, from 62% in 2008.

Financial advisers are able to help, the surveys found.

Parents who work with advisers receive guidance on adjusting investment strategies, exploring supplemental funding sources and using rewards programs to increase college savings, according to the Fidelity survey.

“Our research demonstrates the valuable role that advisers play in providing guidance, especially in tight economic times,” said Jeff Troutman, Fidelity's vice president of college savings. “It also highlights an even larger opportunity for advisers to offer holistic college-planning advice, not just in savings but in securing different types of financial aid.”

The results of the foundation's survey demonstrate the need for parents to save “early and often,” said its chairman, Kevin McMullen, a counsel for State Farm Mutual Automobile Insurance Co.

“The economic reality is that parents cannot count on college loans' and grants' being available or affordable when their children reach college age,” he said.

E-mail Charles Paikert at cpaikert@investmentnews.com.

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