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Contributions to college-savings 529 plans are rising sharply after falling during recession

The amount of money flowing into government-sponsored 529 plans has surged 75% in the last two years as fear of rising college tuition trumps fear of the stock market. Still, contributions remain well below the 2006 peak.

May 30, 2011|By Walter Hamilton, Los Angeles Times
  • Students who graduated in 2009 had an average of $24,000 in student loans, up 6% from the previous year, according to the Project on Student Debt.
Students who graduated in 2009 had an average of $24,000 in student loans,… (Matt Rourke / Associated…)

Fear of rising college tuition is trumping fear of the stock market.

Contributions to government-sponsored college-savings programs are rising sharply after sinking during the recession.

The amount of money flowing into the programs, known as 529 plans, has surged 75% in the last two years but remains well below its 2006 peak, according to a recent study.

Experts applaud the stepped-up rate of investment but say families need to save even more to overcome stubbornly rising tuition costs and cutbacks in government funding for higher education.

"It's reassuring that we're at least approaching previous savings levels, but we probably should be saving a lot more," said Mark Kantrowitz, publisher of college-savings websites Finaid.org and Fastweb.com.

U.S. families poured a net $9 billion into 529 plans last year, up from $5.1 billion in 2008, and the pace accelerated in the first quarter of this year, according to Financial Research Corp. in Boston. The annual peak was $13.9 billion in 2006.

Several factors are being credited for the pickup, including improvements in 529 plans and growing confidence in the stock market's recovery. But experts say the biggest driver is parents' fear that their children will be priced out of college.

The annual cost of tuition, room and board at private four-year colleges averages $37,000, and tops $50,000 at some elite schools, according to the College Board. For students attending public universities in their home states, the average bill has surged to more than $16,000.

College costs continue to rise faster than overall inflation. Over the last five years, fees have swelled an average of 5.2% a year at private schools and 5.9% at public institutions, according to College Board data. In the same period, consumer prices have risen about 2% a year.

"Students and families are more concerned than ever about whether they'll be able to afford college," said Lauren Asher, president of the Institute for College Access & Success.

A 529 plan is a state-sponsored program that a family can use to invest money in a variety of options, including stock, bond and money-market mutual funds. Investment gains are free of federal taxes as long as the money is used for college or other approved educational expenses.

In many cases, the gains are also exempt from state income tax — if you live in the state that sponsors your 529 plan. Some states also give tax breaks for initial contributions, but California does not.

There are 9.6 million 529 accounts nationwide, holding $146 billion, according to Financial Research.

Despite these efforts to save for college, students are borrowing more each year to finance their education. Students who graduated in 2009 had an average of $24,000 in student loans, up 6% from the previous year, according to the Project on Student Debt. In California, the average was $17,326, with 48% of students having some debt.

Default rates on student loans also have risen, in part because of high unemployment among recent graduates.

In March, the Institute for Higher Education Policy reported that 2 of 5 students who began repaying their loans between late 2004 and late 2009 became delinquent at some point in that period. About 15% defaulted on their loans.

The increase in 529 plan investing may stem partly from improvements that states have made to the programs in recent years, including lower fees and a wider selection of investment options, said Laura Lutton, an analyst at mutual fund research firm Morningstar Inc.

California's 529 program, known as the ScholarShare plan, is run by fund giant Fidelity Investments. It was rated "average" by Morningstar in a survey of 529 plans in November. The state board that oversees the plan put the contract to manage it up for bid this year. A decision on whether to hire a new provider is expected as soon as next month.

Teri Ginsburg, a Fidelity spokeswoman, defended the company's offering. "We certainly think our plan is better than average," she said.

walter.hamilton@latimes.com

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