Study urges earlier start for college savings

Many families wait too long to open 529 college savings accounts, which means they miss out on the maximum benefits from the accounts, a new analysis found.

On average, 529 accounts are opened for children who are just over 7 years old, the investment research company Morningstar found in its annual analysis of the state-sponsored plans.

That leaves only about a decade for families to save and for the earnings to compound, said Madeline Hume, lead research analyst for 529s at Morningstar. The company reviewed plans holding about 97% of 529 account assets.

Money in the accounts, which take their name from a section of the federal tax code, grows taxfree and is tax-free when withdrawn and spent on eligible expenses such as tuition, fees, housing, meal plans, books and equipment. (As of 2018, up to $10,000 a year from a 529 fund can be used to pay for private school from elementary school onward.)

The most popular investment options for 529 plans automatically shift funds from stocks to bonds as the child ages. Most of these age-based plans created their investment tracks assuming that college savers would invest for 18 years, from birth until college, Hume said.

Early on, age-based portfolios invest in a higher proportion of stocks, which are more volatile but have more potential for long-term gains. The average agebased portfolio begins with about 83% in stocks when the child is born, gradually reducing the stock allocation to about 67% at age 7 and 14.7% at age 18.

Savers who wait until the child is 7 to open an account miss out on potential gains from early, more aggressive investments. Each year that they wait lowers the growth potential of their savings as the portfolios shift to less risky investment mixes.

Starting just one year earlier can make a significant difference, according to a model that Morningstar based on average allocations for stocks and bonds in age-based portfolios.

Assuming a $50,000 investment, divided into equal monthly installments, someone who began saving when the child was 7 could expect a median balance of almost $81,000 by the time the child turned 18. With a start at age 6, the median balance would be almost $4,000 higher. It could be about $30,000 higher if the account had been opened at birth. (The model used historical index fund returns and doesn’t factor in investment fees.)

So why don’t more people open the accounts sooner? Part of the reason may be that people are simply unfamiliar with 529 plans, Hume said. Research conducted for the College Savings Plans Network, a group that promotes the accounts, found that even though they had been around for more than 20 years, only about one-third of Americans had heard of them.

Another factor, Hume said, may be confusion about how a 529 account affects a student’s chance of receiving need-based financial aid.

The effect depends on who owns the account. Student aid experts said the effect is generally minimal when a parent owns the account for the benefit of a dependent student. The impact can be significant, however, if a grandparent owns the account — but there are several workarounds, said Mark Kantrowitz, publisher of

Savingforcollege.com.

Parents who wait until their child is 7 to start saving, he said, will have to save much more out of their own pocket to reach their goal.

“Your greatest asset as a parent is time,” Kantrowitz said.

In fact, he said, parents can open an account even before a child is born, naming themselves as a beneficiary and then changing the beneficiary to the child’s name after birth. Kantrowitz said he had done that for his children.

How much do I need to invest to open a 529 plan?

Minimums vary, but some plans can be opened without any initial contribution, and continuing contributions can be as low as $10 per month, according to the College Savings Plans Network.

No. You can invest in any plan, but there may be tax benefits to investing in your state’s plan. While there is no federal tax deduction for 529 contributions, many states offer a deduction on state incometax returns. And some offer a deduction even if you open the account in another state.

Do employers offer help with college savings?

More employers are starting to include college savings help as one of their benefits, but it’s not widespread. Eleven percent of employers offered payroll deductions for 529 plans, according to a 2019 survey by the Society for Human Resource Management.

Some companies offer 529 perks as rewards. Alliance Data in Columbus, Ohio, added Gift of College gift cards this year to a menu of rewards that employees can choose from when redeeming points earned in a workplace recognition program, said Deanna Allison, the company’s financial benefits manager. Employees like the cards, she said, because they can use them to make contributions that go directly to the 529 account.

Gift of College, a website that lets friends and families contribute online to 529 accounts, offers 529 gift cards at stores.