Families that don’t need the advance child tax credits to pay for everyday household expenses like utility and medical bills are using the extra income to boost their children’s college savings accounts.
The majority of parents — 58%— in an annual survey by the Washington, D.C.-based College Savings Foundation said they plan to use part or all of the $250 to $300 per child payments they began receiving in July from the federal government to help their children save for higher education.
Most of them — 72% — said money will get channeled to a tax-advantaged 529 plan; 42% of them already had established 529 plans for their children; 30% of parents said the income from the child tax credits will allow them to open a 529 plan and jump-start a college savings fund.
“The message is clear that families are prioritizing savings for their children’s higher education, and are taking advantage of the child tax credit to do so through 529s,” said Vivian Tsai, chair of the College Savings Foundation, a trade group for 529 plan program managers, state sponsors and financial services firms that manage 529 accounts.
529 plans are investment accounts similar to a Roth IRA that offer tax benefits when used to pay for qualified educational expenses for a designated beneficiary. Money in 529 plans is allowed to grow tax-deferred and can be withdrawn tax-free for qualified higher education expenses.
While the national survey of 1,005 parents across the country
in August found 92% of parents plan to pay for their children’s education — and using savings is by far their preferred way to pay for it — the majority of parents will still need to use debt to send their kids to school.
Student loans continue to be a present reality for 34% of the parents in the survey who said they or their spouses were still paying off their own student loan debt.
Nonetheless, 64% of parents in the survey said they would take out loans for their child’s higher education, with 59% of them saying education loans will be their number one financing source.
Student loan borrowers in the United States owe a collective $1.6 trillion in federal and private student loan debt, according to the U.S. Department of Education.
However, 74% of parents are actively putting money aside to cut or eliminate the amount their kids will need to borrow for college; and 34% of parents have already saved more than $10,000 per child.
“It’s a very positive trend for parents to choose savings as their far and away primary way of funding higher education,” Ms. Tsai said.
As of June, ISS Market Intelligence reported 15.3 million individual 529 college savings and prepaid plans in the U.S., with a total of $464 billion in assets families have set aside for future higher education expenses.
Pennsylvania has two 529 plan options. The Pennsylvania 529 Investment Plan, which operates like an investment account; and the Pennsylvania 529 Guaranteed Savings Plan, which allows families to pay for future tuition at today’s prices.
The child tax credit that was included in the American Rescue Plan has provided parents with a unique opportunity to build up a college savings fund.
The monthly payments — representing an advance on half of the taxpayer’s expected 2021 credit amount — would come out to six monthly payments of $250 a month for each child age 6 to 17; and $300 a month per child under age 6.
A growing number of parents — 63% — said they think of vocational and career schools in the same way as public and private colleges.
The survey also revealed that more parents are aware of the other lesser-known uses of 529 higher education savings plans, which can also benefit parents who are looking to change their career and will need future education to do so.
The tax-advantaged accounts also can be used to send children to private or parochial school.
Tim Grant: tgrant@post-gazette.com or 412-263-1591