Parents Dropping Out of 529 College Savings Plan

The 529 college savings plan that many parents have taken advantage of for years have seen a significant decrease in participation in 2008 and 2009. This comes from Financial Research Corp., a Boston research firm that has been keeping track of the amount parents have been setting aside over the past few years.

How the 529 Savings Plan Works

The 529 savings plan has for many years been a successful vehicle for parents to save money for college for their children. To contribute, parents put after-tax dollars into an account that offers a variety of mutual funds and other investments.

Once the parent is ready to withdraw, their investment will be distributed tax-free as long as the funds are used for higher education. If the child decides not to go to college, the parent can only withdraw after paying taxes and penalties on the gains.

The Financial Research Corp. Report

The report from Financial Research Corp. shows that in recent years, contributions from parents have dropped considerably. Here are some stats from the report:

  • In 2006, $15.5 billion put money into 529s
  • By 2007, that number dropped to $15.2 billion
  • 2008 saw a sharp drop in contributions to $5.2 billion
  • So far, in 2009, only $4.8 billion in contributions have been made

The reason that the research firm suggest parents are dropping out has to do with the market crash of 2008. Many parents lost years worth of investments – or had a child not go to college and suffered penalties and taxes – and as a result chose to participate in safer savings options that allowed for more flexibility.

Other Ways to Help Your Children

Some parents have chosen to take on savings options like CDs, money market accounts, and even high-yield savings accounts to earn interest while having more flexibility in touching their money. Some have even purchased insurance annuities or treasury bonds. With interest rates currently so low for the 529 plan, some have even chosen to purchase cheap homes to help their children.

Of course, if you’re looking for a way to pay for college and have run out of savings, you could always pursue the PLUS loan. But of course, before you make a choice, it’s good to weigh all of your options (looking into cheaper schools, etc.) so that you can get your child the best education at the best price.