May 29 is 529 Day, a national observance that acknowledges the importance of the college savings tool, but 66% of Americans still dont understand what 529 plans are, according to financial services firm Edward Jones.
In its annual 529 Plan Awareness Survey, Edward Jones found that only 34% of Americans could correctly identify a 529 plan as a college savings vehicle from among four options, up slightly from 30% in 2014 but down from 37% in 2012.
"Despite headlines focused on the increasingly high costs of college, we still see a significant number of Americans who aren't aware of one of the most important long-term savings vehicles that can help minimize the impact that the cost of education has on families," said Steve Seifert, principal at Edward Jones. "Demographically, people are living longer and having children later in life, narrowing the time between a child's college bills and his or her parents' retirement age. This coupled with the fact that the cost of college is increasing at a much higher rate than inflation, means that many are grappling with how to stay on track to meet savings goals."
Households with income of $100,000 or more were more likely to identify a 529 plan, Edward Jones found. Only 25% of those with household incomes of less than $35,000 could identify a 529 plan.
Respondents with three or more people in their household were more aware of 529 plans than those with only two people. The Edward Jones survey found that respondents with children ages 13 to 17 were less likely to correctly identify the college savings plan than those with children under the age of 13, which was surprising.
Many myths circulate about the impact of 529 savings plans on a persons ability to receive financial aid or attend certain colleges.
The National Association of Student Financial Aid Administrators attempts to debunk three myths surrounding the 529 plan.
Myth 1: 529 plans will limit a persons financial aid award
Distributions from a college savings plan have no impact on student aid eligibility, according to NASFAA. Under the Higher Education Reconciliation Act of 2005, these accounts are treated as assets of the account owner. Assets have a much lower impact on financial aid eligibility than income, the organization found. Plus, any money saved for college decreases the amount needed to borrow lowering overall college costs and increasing the likelihood students will enroll, NASFAA said.
Myth 2: 529 plans can only be used at state schools
According to NASFAA, there are two types of 529 plans. The College Savings Plan allows individuals to set money aside tax deferred until it is disbursed, federally tax-free, at any accredited institution in the country as well as outside of the United States. The Prepaid Tuition Plan, which is offered by states, guarantees the current tuition rate at specific in-state public colleges and will allow the contract value to be transferred to private or out-of-state schools. The Prepaid Tuition Plan is more limiting as they target tuition prepayment to the sponsoring schools or groups of schools and may have restrictions on the colleges covered by the plan, NASFAA said.
Myth 3: The federal government taxes 529 plan earnings
Contributions are not deductible at the federal level, but earnings in 529 plans grow federal tax-free and will not be taxed when the money is taken out to pay for qualified educational expenses for the beneficiary, NASFAA said.
NASFAA is a nonprofit membership organization that represents more than 20,000 financial aid professionals at nearly 3,000 colleges, universities and career schools across the country.
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