Parents boost college savings to protect kids from ‘crushing burden’ of student loan debt – NBC New York

• As uncertainty over federal student loan forgiveness and the rising cost of college become a top concern for families, parents are shifting priorities when saving for higher education, a new study finds.
• More and more families are taking advantage of 529 college savings plans, which offer even more benefits starting in 2024.
• Yet, according to Fidelity, only 30% of parents are on track to achieve their savings goals.

With the threat of federal student loan forgiveness and the rising cost of college becoming a top concern for students and their families, more and more Americans are making saving for a college education a top priority.

In 2024, 74% of parents surveyed have started saving for college, according to Fidelity’s College Savings Index — up from 58% in 2007, when the survey was first conducted. Fidelity surveyed nearly 2,000 families with children in high school and younger between April and May.

“My husband and I kept hearing from people with older children how expensive college is,” said Kathryn Bracho, 48, of Green Bay, Wisconsin.

Bracho and her husband Michael started putting money into college savings accounts in 2017 so their sons — Declan, 15, and Taran, 12 — would have options after high school, she said.

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“I don’t know if we have as much as we expected, but the fact that we’re contributing consistently gives me some confidence,” she said. “They’ll have to take out some loans, but I hope it won’t be as overwhelming.”

There is no doubt that astronomical costs and fears of mounting student loan balances have a major impact on college decisions for students and their parents.

“Families are starting to come together and see the value of a higher education and what they want to get out of it,” said Chris McGee, president of the College Savings Foundation, a nonprofit that provides public policy support for 529 plans.

“Nobody wants anything to do with $1.7 trillion,” McGee said, referring to the total amount of outstanding student loan debt.

How savings help cover college costs

David Ochs, a doctor in Richmond, Virginia, was $315,000 in debt from educational loans when he finished his residency. “It was awful,” the 39-year-old said.

Now the father of two sons, ages 1 and 5, Ochs said he started saving for college shortly after they were born because he didn’t want them to experience the same hardships. “Suddenly, your life is about trying to get out of this suffocating debt.”

Still, contributing to 529 plans required sacrifices, such as forgoing extra payments on student loans, he added. “I think it’s a gesture of love.”

Of the 94% of parents funding their children’s higher education, nearly half say savings are their primary way to pay the bill, according to a new report from the College Savings Foundation. The annual State of Higher Ed Savings survey surveyed more than 1,000 parents of children age 25 and younger in July.

For the first time in the history of the College Savings Foundation survey, more than half of parents responded that they are using a 529 savings plan for college.

Total investments in 529 plans rose to $450.5 billion in June 2024, up nearly 10% from $412.5 billion the previous year, according to the College Savings Plans Network, a network of state-administered college savings programs.

Financial experts and plan investors agree that 529 plans are a smart choice for many. Yet in years past, data shows that regular contributions to a 529 college savings plan often took a back seat to more pressing bills or everyday expenses.

Parents hope to use savings to pay for 67% of their children’s education, but only 30% are on track to achieve that goal, according to Fidelity.

“A college education is still valuable, but the lack of planning is a little concerning,” said Tony Durkan, vice president and head of 529 relationship management at Fidelity Investments.

Benefits of a 529 College Savings Plan

Other recent changes that have helped boost interest include higher contribution limits and the flexibility to transfer unused money to a Roth individual retirement account without income tax or tax penalties, McGee said.

Restrictions on 529 agreements have been loosened and now include continuing education classes, internship programs, and even student loan repayments.

“The changes in the law have certainly broken down the barriers to entry into 529 plans,” Fidelity’s Durkan said.

Let’s take a closer look at some of the changes:

New Rules for Roth IRA Transfers

With Secure 2.0, starting in 2024, families can transfer unused funds from a 529 plan to a beneficiary’s Roth IRA without incurring income tax or penalties. Among other qualifications, the 529 plan must have been open for at least 15 years.

The change comes as a result of the Secure Act of 2019, which allowed 529 users to allocate a portion of their funds to pay off student loans: up to $10,000 per year for each beneficiary of the plan, plus another $10,000 for each sibling of the beneficiary.

Previously, tax-advantaged withdrawals were limited to qualified education expenses, such as tuition, fees, books, and room and board. Now, 529s offer much more flexibility, even for those who will never go to college, Chris Lynch, president of tuition finance at TIAA, told CNBC last year.

In that case, you can transfer the funds to another beneficiary or withdraw them and pay taxes and a penalty on the earnings. If your student receives a scholarship, you can usually withdraw the scholarship amount without penalty.

Higher maximum deposit limits

This year, parents can give up to $18,000, or $36,000 if you’re married and filing jointly, for each child without having those contributions count toward their lifetime gift tax exemption. That’s up from $17,000 and $34,000 married couples filing a joint tax return in 2023

High-net-worth families looking to help fund a family member’s higher education may also want to consider “superfunding” 529 accounts, which allows for early tax-free gifts to be made to a 529 account over a five-year period.

In this case, you can contribute up to $90,000 this year, or $180,000 if you are married. But then you won’t be able to give more money to the same recipient over five years without it affecting your lifetime gift tax exemption.

Fidelity believes that a larger, upfront payment has the potential to yield greater returns than paying the same amount over several years because it has a longer time horizon.

A new “loophole” for grandparents

Late last year, a new, simplified application for federal student financial aid was introduced that offers additional benefits to grandparents with 529 accounts for their grandchildren.

Under the old FAFSA rules, assets accumulated in grandparent-owned 529 college savings plans were not reported on the FAFSA, but distributions from those accounts were counted as untaxed student income, which could reduce financial aid by as much as half of that income.

As part of a simplification of the FAFSA form, students no longer have to answer questions about grandparents’ contributions, effectively creating a “loophole” that allows grandparents to save for their grandchild’s college education without affecting their eligibility for financial aid.

Tax deductions or reliefs for contributions

Even before the recent changes, there were already many benefits to a 529 plan. In more than half of all U.S. states, you can get a tax deduction or credit for your contributions. Your earnings grow tax-advantaged, and when you withdraw the money, it’s tax-free if the funds are used for qualified educational expenses.

Some states offer their residents additional benefits, such as scholarships or matching grants, if they invest in a 529 plan in their state.

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