Morningstar Inc. has released a research paper about family use of 529 plans, New Lessons about 529s. The paper shows that getting middle-income families to shift college savings to 529 plans will yield increased investment returns. The paper also provides practical ideas for getting more families to invest in 529 plans.
Switching College Savings Vehicles could Increase Investment Returns
The paper shows that changing the way that families save for college could have a big impact on college savings, even without any increase in the amount they save. Shifting college savings funds from low-yield bank accounts into 529 college savings plans could yield an additional $4,000 in college savings per child.
Most of the benefit of shifting college savings into 529 college savings plans comes from investing the money and from capital gains, not from state income tax benefits. More than two thirds (68%) of the increase comes from investing returns, a fifth (21%) from capital gains and only a tenth (11%) from state income tax benefits.
Middle-Income Families Benefit the Most
Middle-income families will benefit the most from shifting college savings funds into 529 plan accounts. More middle-income families are using low-yield accounts to save for college than high-income families. Most high-income families are already invested in 529 plans. Middle-income families have also saved more money for college than low-income families.
Visual Comparisons of Financial Benefits are Effective in Influencing Behavior
Morningstar found that visual comparisons of the financial benefits of 529 plans over other account types had the greatest impact on the allocation of college savings funds among the various account types.
The most effective interventions included a table summarizing the advantages and disadvantages of 529 plans and a graph comparing the financial benefits of 529 plans with other account types. These helped address the information overload and complexity of choosing a 529 plan versus other types of accounts.
The paper also argues that providing personalized advice is essential to helping families make smarter financial decisions.