Growth in College Savings Outside of 529s

By Paul Curley, CFA | | October 24, 2018

Families continue to have opportunities to save and save more efficiently for higher education with 529s as college financial planning continues to incorporate bank products, retirement accounts and other investment vehicles.

529s remain the vehicle most strongly associated with college savings, but other structures continue to play a role in the market. According to data from Strategic Insight, 529 college savings plans have experienced significant and continuous growth, reaching $319 billion at the end of 2017 compared to $191 billion five years earlier. Surveys from parents have consistently found that the total assets invested for college savings across other investment vehicles are higher. This provides advisors and employers with an opportunity to add value to their clients and employees by helping them to save and save more efficiently with 529 plans.

The table below displays the total college savings market size at an estimated $1.2 trillion at the end of 2017, a growth rate of about 11% over the previous year. 529 assets saw a higher growth rate at 16%, compared to 9% for non-529 vehicles. Assets in non-529 vehicles continue to tower over assets in college savings plans at $862 billion at the end of 2017. That investors continue to hold so much assets in non-529 vehicles suggests many college savers are facing unnecessary tax burdens. Surveys fielded by Strategic Insight have further backed up this disparity. Among the 59% of surveyed parents who stated they were saving for college, 27% were saving through 529 savings or prepaid plans, while 32% were saving for college with some other investment vehicle than a 529 plan. These numbers demonstrate the substantial market available to 529 product providers and distributors. A majority of parents are not saving for higher education, not saving enough or not saving in the most efficient vehicle in terms of income tax, financial aid and gift and estate tax planning. This culmination of issues is one of the key drivers in rising student loan debt levels on a year-over-year basis.

While assets in 529s have grown at a faster rate, total assets in other vehicles far outweigh them.

The following table reports the breakout of the $1.2 trillion college savings market by investment vehicle type based on the survey of parents used in the Strategic Insight 529 Consumer Survey 2018. The numbers suggest that parents are not storing assets in whatever vehicle they think is most appropriate for college savings, but rather wherever they already have assets. 401(k)s and IRAs, for example, rate high on the list. Liquidity appears to be a prime concern for non-529 savers, as cash and other banking products hold the highest assets at $384 billion. However, these low-yielding options with a higher tax and financial aid impact will do little to ease the burden of college affordability. 529 product providers can highlight a wide variety of advantages the vehicle has compared to these other savings options, including better long-term after-tax returns when used to pay for higher education, improved tax efficiencies and lower financial aid impact to name a few. These factors combined with the pressure of rising student loan debt provide numerous sales opportunities for 529 plans and college financial planning in the future.