A Number for College Funding: 529

If you work with college-aspiring youths from low-income families or youths who may be the first in their family to go to college, Jacqueline Williams wants you to think of 529 as a winning number.

That’s not advice on what lucky numbers to play for the state lottery. Rather, it’s a message about the benefits of investing in a 529 (pronounced “five-two-nine”), the IRS tax code-derived name for the state-operated college savings plans that are slowly making a comeback, according to figures released Wednesday.

Some critics – including one who used to work directly with the 529 industry – say 529s represent a bad gamble because they take college savings money and invest it to varying degrees in stocks – something that didn’t exactly work out too well in 2008.

But Williams – a former 529 administrator in Ohio who now serves as director of the College Savings Initiative at the New America Foundation in Washington, D.C. – and other financial aid experts say 529s are still a good bet.

A statement released Wednesday from the College Savings Foundation shows that a growing number of people agree.

Overall assets of 529s rose to $117 billion in the fourth quarter of 2009, up 6 percent from the prior quarter and 32 percent year over year, the College Savings Foundation statement said.

Analysts say the growth was not necessarily driven by the performance of 529s but by the growth in the overall number of 529 college savings accounts, which the College Savings Foundation says jumped from 9.1 million in 2008 to 9.5 million in 2009.

“American families have fixed their sights on their children’s future,” Peter Mazareas, Chair of College Savings Foundation, said in a statement in response to a query about the source of the increase in 529 members.

“By prioritizing college savings, parents are helping to reduce the level of debt incurred by the next generation to cover rising college costs.”

But 529s have yet to make substantial headway among those of lesser means.

Bridget Bearden, research analyst at the Boston-based Financial Research Corp., provided statistics from a 2009 survey that showed 59 percent of all 529 members fell between the $75,000 to $150,000 income range, while only 26 percent were in the under $75,000 income range – 17 percent in the $50,000 to $75,000 range and 9 percent were under $50,000.

Bearden says the growth in 529 members shows that people are slowly starting to regain confidence in 529s after the economic downturn that began in late 2008.

“There’s still a level of wariness when it comes to opening 529s, but it’s much better than where we were same time last year,” Bearden said of the growth in new 529 accounts.

She said it will take time before growth returns to what it was in 2006 and 2007, when it was 18 percent and 14 percent, respectively.

Growth was 9 percent in 2008, but that growth was driven mostly by the first two quarters.

“What really hurt the market was the third and fourth quarters in ’08 and the first quarter of ’09,” Bearden said.

For Williams, the benefits of setting up a 529 transcend the bottom line of a financial statement. In fact, she says, just setting up a 529 is a statement itself.

“529s are not the be-all and end-all, but since they are dedicated for the purpose of going to college, they are a tangible manifestation of that family saying, ‘I believe you’re going to college and I’m doing something to try to help you get there,’” Williams said. “The overwhelming advantage of having a 529 is it provides a concrete strategy for how you’re going to make it happen.”

Mark Kantrowitz, a financial aid guru and publisher of the FinAid and FastWeb web sites, says that while 529s can be an effective way for low-income families to save for college, their success hinges on certain factors, such as the fees.

Noting that people don’t have to choose 529 plans in their home states, Kantrowitz advises against picking any 529 plan with fees of more than 1 percent, because higher fees will cancel out the tax advantages.

“The best-managed plans, the ones with the lowest fees and which seem to do the best over the long term, are the ones managed by Vanguard, TIAA-CREF, and Fidelity,” Kantrowitz said. “Those three specialize in low fees for their services and seem to do quite well in practices.

“They manage the plans for the states and they’re becoming more and more popular with states because they’ve been doing so well and have lower fees.”

Williams says 529s come with different options for those who may be risk-averse. She espouses setting up 529s for children and youths of all ages, whether they’re in high school or still in a highchair.

“Any age is ideal,” Williams said of the ideal age to set up a 529. “It’s never too late. It’s never too early.”

Jamaal Abdul-Alim covers College & Careers through a grant from the Bill & Melinda Gates Foundation. He can be reached at Jamaal@youthtoday.org 

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