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.

"They may be used for any post-secondary institution that accepts financial aid, including some schools abroad," she says. "Parents can select a new beneficiary, even themselves, if the original plan beneficiary decides to forgo college."

In addition to traditional 529 college plans, there are state and private prepaid tuition plans. Both 529 and prepaid tuition plans are offered by most states. Families can also set up a private prepaid tuition fund through a consortium of some 275 private colleges and universities. The private prepaid plan allows family investors to apply that money for tuition at any of the participating schools.

Prepaid plans allow parents to make payments today for future tuition credit that their children can use at present-day dollars when they enroll in college in the future. Prepaid program assets rose an estimated 28% for two years through the end of 2011, according to FRC.

"Prepaid plans have been growing over the last two years due to more advisors guiding their clients with a holistic approach," Curley says. There has also been "an increase in investor awareness of college debt and product providers implementing new structures to improve investor interest in the product."

While prepaid tuition accounts are also projected to post steady growth in the next two to five years, only an estimated 10% of financial advisors use prepaid college savings plans for their clients while an estimated 92% of advisors use 529 plans, according to an FRC survey of 375 financial advisors conducted last July.

Financial advisors say 529 plans are more reliable investments that don't depend on the stability of a state's tuition pool, which in the past could not keep pace with the faster increase of college costs. 

Tom Bullitt, senior investment advisor for Waltham, Mass.-based Mill Street Investment Management, a division of Ballentine Partners, says 529 plans make a lot of sense, "especially if you have a monthly program of investing in them, or you are able to put in a sum of money initially when the child is born. College expenses are real and they're big, and it's a real good idea to put some money away for them."

Also fueling the increase in 529 college savings and prepaid tuition plans is the nation's sizable student loan debt, which passed the $1 trillion mark last year. Tuition and fees at U.S. public universities also rose last year to 8.3%, twice the rate of inflation according to a College Board report.

Escalating college costs have even begun to concern mass affluent investors. In a survey conducted by Bank of America's Merrill Edge group, published in April, an estimated 64% of survey respondents indicated that their children's college or university costs were more expensive than they had anticipated.

"College tuition is astronomically high, rising at double the cost of inflation," says Vijay Marolia, chief investment officer at Lake Mary, Fla.-based Private Wealth Management. "It's tax-free growth for college, so why wouldn't you use [a 529 plan]?"

While industry experts agree that 529 plans and prepaid plans are steadily growing, there's disagreement about whether financial advisors are promoting them enough.

Last year, an estimated 21% of 529 plan sales were sold directly, while RIAs accounted for 19% of sales and broker-dealers accounted for 15%, according to FRC figures.

Meanwhile, independent financial advisors accounted for 59% of 529 assets in 2007, but only 51% at the end of 2010. The bottom line, says FRC's Curley: "While the overall industry has been growing, the advisor-sold channel has been less effective in capitalizing on this trend."

"Several states, including California, have abandoned their financial advisor-sold plans," says Roame. "The 529 plan market is increasingly a direct-to-consumer market." Financial advisors who charge fees now often send people interested in 529 plans off to Schwab or Vanguard to open a plan on their own, since the initial account minimums are so low.

Feirstein says the assets have shifted in the college saving fund market in the last six to eight years. "There was a point in time where the advisor channel, with all those advisor-sold plans, really drove the market, accounting for as much as 75% to 80% of the assets in accounts in the market."

But by the end of 2011, she says, assets had gradually shifted to the plans sold directly, with 50% to 51% of all assets and accounts sold in that channel. "It is not as robust a product as it used to be for advisors," she says. Since these items are full of equities, after they crashed, many clients became suspicious of them, and advisors were not making a lot handling them for clients.

Feirstein says sponsors who sell 529 plans directly to clients may be doing a better job of getting the word out and promoting them. "As these plans gain more business media exposure and consumers hear more about 529s," she says, "people will gravitate toward buying their own college savings plan without professional financial advice."

Case in point: The California State Treasurer last October shut down its 529 plan sold through advisors. Such plans have steadily lost market share to their counterparts sold directly, losing 9% in the past five years. Experts predict the trend will pick up speed as the regulation of the brokerage industry expands under the Dodd-Frank Act.

Deborah Fox, founder and president of San Diego-based Fox College Funding LLC, says the downside to 529 plans is that they offer less flexibility than other financial savings options out there to help clients save for college. "The biggest disadvantage is that clients are only able to make an allocation change twice per calendar year," Fox says.
"That proved to be problematic after the 2008 financial crisis."

Fox says there is some good news: Many state 529 plans are reducing their costs. "They've added new investment options; they got plans that have ETFs now instead of just funds. We have more flexibility now."

Michael Beloff, a financial planner for the Shelton, Conn.-based Barnum Financial Group, an affiliate of MetLife, says a 529 plan is now a more attractive college savings option than in the past "because you can move the money among beneficiaries." And although financial advisors have played a diminished role in selling the 529, Beloff thinks that they still have a part to play in getting these vehicles into the hands of investors.

"With the plethora of financial college saving plans out there, I think it's confusing for individual investors," Beloff says. "There is an education component for advisors to educate families on things such as in-state versus out of state, [or] why you might choose an out-of-state 529, even if there is a state tax deduction for their home state plan. All these are reasons to work with an advisor."

This can be particularly remunerative for advisors cultivating relatively young clients, since this demographic actually has some reason to start thinking about college savings earlier than one would expect.

"Most advisors concentrate on the 55-plus market; that's where the money is," Beloff says. "They're not necessarily involved with parents and clients in their 30s and 40s. By focusing on that market, you're looking at a younger client base than your traditional client base in their 50s and 60s as a way to get those folks early by helping with a real issue: What is the best way to save and pay for college?"