With college costs typically increasing at twice the rate of inflation each year, most American families now view a college savings plan as a fiscal necessity, not an option.
At the same time, these savings plans have rebounded from the 2008 market crisis and now boast $414 billion in assets under management, according to Tiburon, Calif.-based Tiburon Strategic Advisors.
In one report, College Savings Plan Market: The Increasing Dominance of 529 Plans, Tiburon estimates that about $119 billion of the overall figure is in 529 tax-deferred plans operated by states, while the rest is in vehicles such as custodial accounts and Coverdell educational savings accounts. Each state 529 plan operates a little differently, but most offer tax-free withdrawals to fund college education.
Chip Roame, managing principal at Tiburon, says 529 plans are growing rapidly. "That 529 plan growth is being driven by free cash flows of consumers-as the economy improves, more dollars flow to 529 plans-and perceived tax rates: If taxes go up, the tax deferral is worth more."
Tiburon predicts the number of college savings marketing firms will increase from today's 546 to 760 by 2014, while the overall number of college savings accounts will increase from 18 million to 23 million by that time.
Assets under management in college savings plans will steadily climb over the next two years with 529 plans taking a major market share, says Tiburon Research. The number of 529 accounts is projected to grow from 9.9 million to 10.9 million by 2014 while assets under management will reach $350 billion.
Paul Curley, director of College Savings Research for Boston-based Financial Research Corp., says there has been a broadening of the investor base for 529 plans as more people become aware of and understand them. The recent growth of traditional 529 plans, says Curley, has also been fueled by an increase in the number of products now out there.
"There's better products to meet the needs of investors," he says. Specifically, he mentions the FDIC-traded investment options-tax-advantaged 529 plans where FDIC-guaranteed insurance is available to protect the educational savings plan portfolio. There are also variations like target-based or age-based investment options. "Altogether, we've seen an expansion of 529 plans and an overall improvement of the marketing material."
Andrea Feirstein, founder and managing director of New York-based AKF Consulting Group, a financial advisor firm that specializes in the 529 college savings market, says that despite their stock market risks, "over time, 529 plans are the most effective vehicle to save for college."
In addition to offering tax-free compounding and tax-free withdrawals at the federal level, 529 plans layer on state tax benefits in many states and give parents control and flexibility, Feirstein says.