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Joe's blog

The '529 Guru' offers his random thoughts.

05/29/2009: Hooray, hooray, it's National 529 College Savings Day. (5-29-09. Get it?) No, your kids don't get the day off from school. But what you parents are supposed to be doing today is fortifying your college funding war chest, or at least making plans to do so.

In honor of the occasion, Sallie Mae and Gallup have today released a report detailing its survey of over 1,200 parents of under-18 children regarding their college savings. What struck me was the finding that 59% of college savers were using savings accounts, money market accounts, and CDs, and that 41% were using stocks and bonds. This compares with only 33% using a 529 college savings plan.

Let's forget for a moment about the question of using stable-principal investments (savings, money market, and CDs) versus marketable investments (stocks and bonds) and focus on the 59% of savers that put at least part of their college savings in bank accounts and money market funds.

These parents are paying income taxes on the interest they earn, at their ordinary-income tax bracket. Those taxes are reducing the amount they will have to save for college. Obviously, these parents don't realize they can find equivalent, or even better, stable-principal investments in 529 plans and NOT pay income tax.

Better products in a 529 plan? Sure thing. How about a stable value fund paying 3.35% interest through the end of 2009 (Colorado Stable Value Fund)? Or a principal-plus-interest option currently paying 3.75% (Michigan)? Or a guaranteed option that cannot drop below a 3% interest rate (Minnesota)? Yesterday I called Union Bank and Trust in the Commonwealth of Virginia to inquire about interest rates for its 529 product in the CommonWealth 529 Plan and was told the rate earned for a 529 savings account was currently more than six times the rate for a non-529 savings account in the same bank.

And these products are all completely liquid: you can invest today and cash out in a month to pay college bills. If you are willing to lock in for a while, you can find a 10-year CD that as of May 18 was still available with a 5.0% interest rate (Ohio CollegeAdvantage). Where else can you get that, tax-free no less?

The Sallie Mae/Gallup survey asks those not using 529 plans "why not?" The answer is that most are simply not familiar with 529s. That's the challenge facing the states and the rest of the 529 industry.

The survey report is available here.



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