College savings increase to protect students from overwhelming loan debt.

• Recent studies indicate that with the uncertainty of federal student loan forgiveness and the increasing cost of college, parents are placing a higher priority on saving for their children's education.
• More families are utilizing 529 college savings plans, which offer enhanced advantages as of 2024.
• According to Fidelity, only 30% of parents are meeting their savings targets.

As federal student loan forgiveness faces uncertainty and the cost of college continues to rise, more Americans are placing a higher priority on saving for higher education.

Nearly 74% of parents surveyed in 2024 have started saving for college, up from 58% in 2007, according to Fidelity's College Savings Indicator. The study, conducted between April and May, polled nearly 2,000 families with children high school age and younger.

Kathryn Bracho, 48, from Green Bay, Wisconsin, stated that she and her husband constantly heard from parents of older children about the high cost of college.

In 2017, Bracho and her husband, Michael, began saving for their sons' college education, with Declan, 15, and Taran, 12, in mind.

The FAFSA rollout was a complete failure, according to a college aid expert.

"Although we haven't met our expectations, the steady contributions give me some comfort. I hope the loans they need won't be too overwhelming."

The high costs and worries about growing student loan debts have greatly influenced college decisions for students and their families.

Chris McGee, chair of the College Savings Foundation, stated that families are starting to align in the same direction and recognize the importance of higher education and their goals for it.

McGee stated that no one desires to be included in the $1.7 trillion of outstanding student loan debt.

How savings plays into covering college costs

By the time he completed his residency, David Ochs, a physician in Richmond, Virginia, had accumulated $315,000 in education loans. "It's been a nightmare," the 39-year-old said.

Soon after the birth of his two sons, ages 1 and 5, Ochs began saving for their college educations to prevent them from facing the same financial struggles he had experienced.

Contributing to their 529 plans has required him to make sacrifices, such as forgoing extra payments toward his student loans, he stated. "I believe it's a gesture of love."

Nearly half of the 94% of parents who fund their children's higher education do so through savings, according to a report by the College Savings Foundation. The survey, conducted in July, polled over 1,000 parents of children aged 25 and younger.

In the College Savings Foundation survey's history, more than half of parents have started using a 529 college savings plan for the first time.

The amount of investments in 529s increased by almost 10% in June 2024, reaching $450.5 billion from $412.5 billion the previous year, as per data from College Savings Plans Network, which oversees state-managed college savings programs.

While financial experts and plan investors agree that 529 plans are a smart choice for many, data shows that regular contributions to a 529 college savings plan were often neglected in favor of paying more pressing bills or daily expenses in previous years.

Despite the hope of parents to save for 67% of their child's education, only 30% are currently on track to achieve that goal, according to Fidelity.

Tony Durkan, a vice president and head of 529 relationship management at Fidelity Investments, stated that while a college education is still valuable, the lack of planning is a bit concerning.

The benefits of a 529 college savings plan

McGee stated that the recent changes, including higher contribution limits and the ability to roll over unused funds into a Roth IRA without paying taxes or penalties, have contributed to increased interest in retirement accounts.

The restrictions on 529s have been relaxed to include continuing education classes, apprenticeship programs, and student loan payments.

Fidelity's Durkan stated that the legislative updates have undoubtedly reduced the barriers to entry for 529 plans.

Here's a closer look at some of the changes:

New Roth IRA rollover rules

Starting in 2024, families can transfer unused 529 plan funds to the account beneficiary's Roth IRA without incurring taxes or penalties, as long as the 529 plan has been open for at least 15 years.

The Secure Act of 2019 allows 529 plan beneficiaries to use some of their funds towards their student loan debt, up to $10,000 per year per beneficiary, as well as an additional $10,000 for each of their siblings.

Now, 529s offer more flexibility for those who never go to college, according to Chris Lynch, president of tuition financing at TIAA, who stated this to CNBC last year.

If your student earns a scholarship, you can typically withdraw up to the amount of the scholarship penalty-free. However, if you transfer the funds to another beneficiary or withdraw them and pay taxes and a penalty on the earnings, you may not be able to withdraw the funds penalty-free.

Higher maximum contribution limits

In 2023, parents can gift up to $18,000 per child, or $36,000 if married and filing jointly, without those contributions affecting their lifetime gift tax exemption. This is an increase from the previous year's limits of $17,000 and $34,000 for married couples filing jointly.

Consider "superfunding" 529 accounts for high-net-worth families looking to help fund a family member's higher education by frontloading five years' worth of tax-free gifts into a 529 plan.

Contributing up to $90,000 this year or $180,000 for a married couple would allow you to give more money to the same recipient within a five-year period, but it would reduce your lifetime gift tax exemption.

According to Fidelity, a larger lump-sum contribution upfront may result in more earnings compared to the same size contribution spread out over several years due to its longer time horizon.

New grandparent 'loophole'

The new simplified Free Application for Federal Student Aid was introduced last year, offering advantages to grandparents who have 529 accounts for their grandchildren.

Under the previous FAFSA guidelines, assets in grandparent-owned 529 college savings plans were not included on the FAFSA form, but withdrawals from those accounts were considered untaxed student income, potentially reducing aid by up to 50%.

The FAFSA simplification has eliminated the requirement for students to answer questions about contributions from grandparents, resulting in a potential "loophole" for grandparents to save for their grandchild's college without affecting their financial aid eligibility.

Tax deductions or credits for contributions

Advantages of 529 plans have been present even before recent changes. In over half of U.S. states, contributions receive a tax deduction or credit. Earnings grow tax-advantagedly, and withdrawals are tax-free when used for qualified education expenses.

Some states provide extra perks, including scholarships or matching grants, to their residents who contribute to their state's 529 plan.