YOUR MONEY-Assets climb in 529 accounts, but few use them
NEW YORK, March 12 (Reuters) - Assets in 529 plans climbed to nearly $200 billion in 2012, but the number of families drawing from their accounts to pay for college was just a fraction of the growing student population, according to a report on the plans released on Tuesday by the College Savings Plans Network.
Last year, 12 percent of 529 account holders took distributions to pay education bills, covering only about 6.6 percent of the total number of U.S. college students.
There were 20.4 million college students in the United States at the end of 2011, according to the U.S. Census, up from 17.5 million in 2005.
Earnings in the plans are deductible from federal and state income taxes as long as the money is used for qualified education expenses, including tuition, fees, and even computers and internet connections. More tax benefits are offered by various states individually.
The total number of 529 accounts increased 3.7 percent over the last year to 11.1 million, a modest growth rate that has held steady since the plans were introduced by the Internal Revenue Service in 1996.
"The word still needs to get out," said Michael Fitzgerald, Iowa's state treasurer and chair of the College Savings Plans Network.
The good news for families is that assets in 529 plans showed a sharp recovery last year. Total assets climbed 15.7 percent to $190 billion in 2012 after dropping to $104.9 billion during the recession, according to the report. Accounts reached a record high average of $17,174 in 2012 after falling 28 percent in 2008, to $10,690.
Americans are less likely to save in 529 plans for college than in bank savings accounts or CDs, according to a recent report from Sallie Mae, the government-backed student loan organization. Some even choose to use their retirement 401(k) accounts as back-up funds if they need it for college costs. Many choose to save for college in bank savings accounts or even use their retirement 401(k)s as back-up funds if they need it for college costs.
Only about half of 529 accounts received contributions last year - down from 82 percent in 2002. This was at a time when the children of the plan's early adopters have come of age, and distributions rise to pay for college costs.
On the other hand, the pace at which new adopters open plans remains steady while college costs continue to rise, up 8.3 percent last year, according to a recent report released by the State Higher Education Executive Officers Association. The gain is likely to be the average rate of annual increase - about 8 percent - in the future, says FinAid.org.
The slow economic recovery has led states to cut funding for students in state-funded financial aid programs. The amount of state and local support declined by 9 percent in 2012 to $5,896 per student, the lowest level in 25 years, according to the report.
However, those who are actively using 529s are doubling down on contributions. This year is expected to see another solid jump in overall assets, due in no small part to a stronger stock market, according to Joe Hurley, founder of savingforcollege.com.
"The recent strong market may be causing some people to take money out of their bank accounts and putting it into 529s," said Hurley.
(Reporting by Heather Struck; Editing by Dan Grebler)