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As college costs continue to rise, more people are opening 529 plans to cope with the higher tuition bills and other school expenses.
Assets in 529 plans reached a record level of $258.2 billion in June, a 5.6 percent year-over-year increase, according to the College Savings Plans Network, an association of the state-sponsored plans. Those figures combine the assets of 529 college savings plans, which offer tax-advantaged investments to pay for qualified school expenses, and 529 prepaid plans, which let investors lock in future tuition at in-state public colleges at current prices.
The total number of 529 plan accounts jumped to 12.33 million in June, a 4 percent increase from June 2014. About 45 percent of those accounts received a contribution in the first half of 2015. Contributions are expected to increase as the year progresses since various tax incentives offered by states require that contributions be made by the end of year.
"Five twenty-nines continue to grow in terms of assets and accounts, and there continues to be an opportunity for future growth within the direct, employer and advisor-sold channels," said Paul Curley, director of college savings research at Strategic Insight, a financial research firm.
Despite the growth, though, most people still don't know about the plans or use them to save for college. Two-thirds of Americans said they didn't know what a 529 plan is, according to a May survey by Edward Jones, and Sallie Mae found only 27 percent of families saving for college use 529s, down from 29 percent in 2014.
While assets in college savings accounts have increased, the average 529 account balance was only $20,934 as of June. That's enough to pay for one year of in-state tuition, fees, room and board at a public, four-year university or half a year of expenses at a private college, according to the College Board.
Betty Lochner, chair of the College Savings Plans Network and director of Washington state's 529 prepaid plan, said the average balance may be lower than desirable, but the typical 529 plan investor will have roughly half of what they need to pay for college by the time the plan's beneficiary is ready to go to school.
Lochner wants to boost 529 plan contributions by encouraging people to start saving for college as soon as possible. "Fifty dollars a month when your kid is a baby is going to make a huge difference once the kid the ready for college," she said.
The college savings plans have gained momentum since grabbing headlines in January. That's when President Barack Obama proposed no longer allowing earnings on new contributions to 529 college savings plans to be withdrawn tax free. After swift backlash from the public and lawmakers, the administration withdrew its proposal days later.
Then the House passed a bipartisan bill in February that actually expanded tax benefits for 529 plans, allowing college students to use 529 funds for computers and other school-related technology. A companion bill unanimously passed the Senate Finance Committee, but has yet to receive a full floor vote.
"I don't know if that bill will pass this year," said Lochner. "But if not, we will try again next year."
Strategic Insight's Curley said the focus on college affordability during the 2016 presidential campaign should also raise awareness about the tax and financial benefits of 529 plans.
Some state lawmakers are also helping to give the plans a boost by offering incentives for employers who match employee contributions. In July, Nevada passed a law that gives employers a 25 percent tax credit on matched contributions to 529 college savings plans up to $500 per employee. The tax credit goes into effect on Jan. 1. Illinois has allowed employers to claim a 25 percent tax credit for matches up to $500 per employee contributing to a 529 plan since 2009.
"We hope to see more states make it easier for employers to offer 529 plans as an employee benefit," said Peg Creonte, senior vice president at Ascensus College Savings, which provides administrative services for 31 such plans across 17 states.