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529 college plans grow, but still won't cover costs

Students walk to class at the University of Colorado in Boulder.
David A. Grogan | CNBC

As presidential candidates debate the merits of debt-free college, assets in 529 college savings plans grew to record levels.

Total 529 savings plan assets rose to an estimated $242.7 billion as of June 30, reflecting a 3.4 percent increase from a year ago, according to financial research firm Strategic Insight. (See chart below.)

Assets in 529 plans, which offer tax-advantaged investments to pay for qualified education expenses, should rise as the Standard & Poor's 500 index hits new highs, however, the average 529 account balance would not cover one year of in-state expenses at a public, four-year college.

The median 529 plan account balance was $14,005 in the second quarter, Strategic Insight reports, up from $13,067 the same period last year.

The College Board estimated students at a four-year, public university paid an average of $19,550 during the past academic year for tuition, fees, room and board.

The 529 college savings plans, which are sponsored by state governments, have been around for almost 20 years. Yet three out of four investors don't know what a 529 plan is, according to a recent survey by investment firm Edward Jones.

Sallie Mae, the largest private student lender, found that only 16 percent of parents used 529 plans or other college savings vehicles for the 2015-16 academic year, down from 17 percent a year ago.

"Student loan debt is front-and-center in the presidential election. This will make more parents aware of how 529 plans can help them save for college," said Paul Curley, director of college-savings research at Strategic Insight.

Even if 529 investments don't cover all tuition expenses, families can use them to reduce their long-term debt, said Peg Creonte, senior vice president with Ascensus College Savings, which administers 31 plans in 17 states.

Seventy percent of Ascensus 529 plan accounts had balances of less than $30,000 last year, which wouldn't be enough to pay for one year at an average private school.

However, parents with children ages 16 to 17 had an average balance of $29,653. It would cost a student more than $36,500 to borrow that amount using federal student loans.

"People are saving a moderate amount in 529 plans," Creonte said. "That's money parents and students don't have to borrow for college."