Less than 3% of families used Section 529 college savings plans or Coverdell education savings accounts to sock away cash for tuition and other higher-education expenses.
A Government Accountability Office report released yesterday found college savings by families to be pretty dismal, even among parents who said saving for college is a financial priority. In fact, of that group, only about one in 10 had opened either a 529 or a Coverdell.
Both savings accounts offer substantial tax benefits.
Wealthier and more educated families were most likely to have opened a college savings account, according to the report, which was based on government data, including the Survey of Consumer Finances. Families with 529s or Coverdells had 25 times the median assets and three times the income of families that hadn't opened such accounts. The percentage with college degrees was twice as high for families with 529s or Coverdells, the report noted.
The reasons for the slim participation rates are twofold. Many parents are having trouble setting aside funds for college because they don't make enough money. Others underestimate the cost of college, which more than doubled the rate of inflation from 2005 through 2011.
“[For families] who do plan to save, many do not know 529 plans exist as a savings option,” the report said. “Additionally, once families decide to invest in a 529 plan, they may have trouble understanding how it works, and the variation across plans may affect their ability to select one that best meets their needs.”
The features that families consider the most important when choosing from among the more than 100 529 college savings plans that states offer are the tax benefits, fees and investment options.