(Dow Jones) Congress is considering legislation that would enable banks to directly offer FDIC-insured 529 college savings products, which grow free of federal taxes unlike traditional bank savings accounts and certificates of deposits.
The house last month approved a bill that would enable the banks to offer the products at branches. Several states offer 529 bank CDs through their websites.
The change could be a boon for banks, which hope to offer the 529 products just as many provide IRAs. More states are expected to add bank options if the legislation is approved to keep up with the competition.
"I think it serves a practical purpose to have a bank product in your line-up," says Andrea Feirstein, managing director of AKF Consulting Group in New York, which advises states and public authorities that administer 529 plans. "It enables you to reach people who would otherwise not be saving in a 529 account."
No one knows how many more people would use 529s if the bank product becomes more widely available, but a 2009 Sallie Mae report found that despite the tax benefits of a 529 college savings account, almost 60% of families used traditional savings accounts, money markets and certificate of deposits for college savings, and only 33% used 529 college savings plans.
"Some people consider themselves savers and not investors," says Jackie Williams, director of the college-savings initiative at the New America Foundation, a nonprofit, nonpartisan public-policy institute based in Washington, D.C.
Williams, former executive director of the Ohio Tuition Trust Authority, says investors use the Ohio bank product to diversify a portfolio, especially as students enter high school.
She says that while age-based products in 529 plans offer some of this diversification, many people discovered during the market downturn that these products varied significantly.
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