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COMMENTARY | U.S. households are saving at an historic pace, and new and existing 529 savings accounts are up 14% year over year.
While the Covid-19 pandemic has brought many economic hardships, one surprising positive consequence is the increase in savings some families have been able to obtain. While a sharp demographic divide exists in age, sex and race in who is saving more, in aggregate, U.S. households are saving at historically high rates.
According to the Federal Reserve, reduced household consumption, combined with historic increases in government aid such as stimulus checks and other payments, has led to some households having more money at the end of the month. In February 2021, after paying their expenses and taxes, households still had 13.6% of their income left over. A year earlier, in March 2020, they had 33.7% of their income left over. For comparison, the highest remaining household income in 2019 was 8%, the Federal Reserve says
What have families done with their historically high levels of remaining income? Recent data suggests that many families dedicated some of their savings to their children’s future college expenses. Despite all the changes and uncertainty of 2020, families saved more money for college than ever before.
In 2020, approximately 500,000 new 529 savings accounts—specialized savings accounts designed to help families save for future education expenses—were opened, bringing the national total to 14.83 million. Total national investment in new and existing 529 accounts surpassed $425 billion, a year-over-year increase of 14%.
Savings in a 529 plan grow free from federal income tax, and withdrawals remain tax-free when used for qualified expenses. Currently, 49 states and the District of Columbia offer 529 plans.
So why are families attracted to placing their savings in 529 accounts during this challenging time? Mainly because these accounts offer the flexibility that individuals need, especially in times like these. In addition to tuition at traditional two-year and four-year colleges and universities, 529 funds can be used to pay for technical and vocational schools, apprenticeship programs, student loan payments and certain K-12 tuition payments.
529 savings plans are also increasingly affordable and accessible. Most plans have very low or zero-dollar thresholds to open an account. They also help families save through a wide variety of scholarships, savings matches and child savings accounts programs.
Despite the economic challenges of the past year, some form of post-secondary education is critical to accessing the well-paying jobs of tomorrow’s economy. However, education can also be expensive. Grants from the federal government, states and educational institutions can help reduce the cost, but they are rarely sufficient to cover all expenses.
According to the College Board, for the 2020–2021 academic year, the average full-time community college student received $3,990 in grants but the average cost for tuition, fees, books and supplies totaled $5,230. The average full-time undergraduate at a public four-year school received $7,330 in grants but total costs were $23,420. And at four-year nonprofit private colleges, the average student received $21,660 in grants to help reduce a full cost of attendance of $52,010.
Unfortunately, too many students and their families must take on debt to cover the gap between grants and the full costs of college. In 2018-2019, the average bachelor’s degree recipient graduated with an average of $16,100 in student loans and aggregate student debt levels increased to $1.57 trillion. Placing funds in 529 accounts help to further reduce the college cost burden and help college-bound students have more financial flexibility. Every dollar saved in a 529 account is a dollar less that may have to be borrowed in the future.
As our country emerges from this pandemic, I hope families will continue to find ways to save—be it $10 or $500 a month—to reduce the burden of student loan debt and enable American students to achieve their long-term educational goals.
Michael Frerichs was first elected Illinois state treasurer in November 2014 and re-elected in November 2018. He is also the chair of the College Savings Plan Network, which brings together administrators of 529 savings and prepaid plans and their private sector partners to offer convenient tools and objective, unbiased information to help families make informed decisions about saving for college.