According to this article, over two thirds of Americans do not know what 529 college savings plans are, despite the fact that the average student loan debt is $27,000 for college graduates. Earnings in 529 plans are exempt from income tax if the earnings are used for higher education. In addition, some 529 plan contributions can be deducted on state income tax returns.
The main downside of 529 plans is the limited use of funds for education. If a child chooses not to attend college or receives a full scholarship, earnings withdrawals will be subject to a income tax and a 10% penalty. An alternative is to transfer the funds to another beneficiary, such as a sibling.
Based on my experience, even people that know about 529 plans often choose not to use them. Sometimes it's due to lack of funds, sometimes it's avoidance of additional financial complexity, and sometimes it's just lack of interest. Generally, 529 plans appeal to people that have higher than normal interest in financial matters.
For more on Crossing Generations, check back every Thursday for a new segment.
This is not financial advice. Please consult a professional advisor.
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