I can recite Goodnight Moon from memory, rank the best grocery stores based on availability of race car shopping carts, and miraculously find a mini yellow dump truck amidst a room full of toys. You guessed it: I’m a mom.
And, while much less impressive to my 3-year-old, I know a lot about saving for college. Thanks to my job with Vanguard Education Savings Group, I understand the tax benefits of saving for college, can compare and contrast a variety of college savings accounts, and know where to find the answer to almost any question about 529 college savings plans.
Through the combination of my role in education savings and starting to save for my own son, I have some insight into how parents save for college. And my conclusions are supported by recent Vanguard research.1
In this post, I describe the 3 types of college savers you’re likely to meet at day care, in the pediatrician’s waiting room, or at the trampoline park. In a perfect world, all parents are disciplined 529 savers. Realistically, we all have competing priorities and limited time and resources. Perhaps not surprisingly, just over a third of college savers fit into the disciplined-savers category.
See which group you fit into and whether you can take any steps to maximize your efforts.
1. General savers
These parents are on the right track—saving for college—but they may not be investing in the optimal account type to reach their goal. According to Sallie Mae’s How America Saves for College 2016, about 40% of these general savers use a checking account to save for college, and 60% use a savings account.
If you find yourself in this group, kudos for saving! You’re thinking long-term and earmarking a portion of your income for an incredibly worthy goal. But before you add another dollar to your taxable account, consider this example:
If you save $3,000 a year for college in a taxable account before your child turns 1, and the account earns 5% per year, you’ll pay $10,372 in federal taxes by the time your child turns 22. If you invest that money in a 529 account instead (all other factors being equal), you’ll pay $0 in federal taxes by the time your child turns 22.2 That difference doesn’t even account for the additional tax benefits that may apply at a state level, depending on where you live.
Because you’re already committed to saving for college, it may be worthwhile to do some research about the account you’re using to hold (and ideally grow) your savings.
2. Inconsistent 529 savers
College savers in this group want to save for college and are familiar with the perks of investing in a 529 account because they own one.
If you self-identify as an inconsistent 529 saver, you probably have the best intentions to be a disciplined college saver but aren’t able to contribute as often as you’d like. You’re not alone: According to our research, which reviewed the behavior of 100,000+ Vanguard clients who invest in a 529 account, 40% contribute less than once a year after opening an account, and 15% haven’t made any contributions since their child turned 3.
If you’ve lapsed on college savings, it’s not too late to get back on track (even if your child is in high school or is already in college). Every dollar saved is a dollar that doesn’t need to be borrowed, and contributing to a 529 account can potentially give you immediate tax deductions and tax-free withdrawals on future qualified higher-education expenses.
3. Disciplined 529 savers
These parents have a goal, and they’ve chosen an account type that’s specially designed to help them reach it. 529 accounts have minimal impact on a child’s financial aid eligibility, and they offer state and federal tax savings, high contribution limits, and a variety of investment options.
If you’re a member of this group, you know how to save for college. And you’re in good company—the number of college savers using 529 accounts is growing each year. In 2015, 27% of college savers were using a 529 account. In 2016, 37% of college savers were using a 529 account.3 Among all parents saving for college, disciplined 529 savers will be the most prepared to tackle the rising cost of college.
Not all disciplined 529 savers are alike. For example, some savers get an earlier start or contribute more frequently than others. Our research showed that 85.4% of Vanguard 529 account owners opened a 529 account before their child turned 11, and 66.5% opened an account before their child turned 6. As the example below shows, parents who don’t procrastinate in opening an account end up with the most college savings:
If you open an account right after your child is born (age 0) and contribute $3,000 a year (earning 5% per year) for 18 years, your account balance will be almost $89,000 by the time the first tuition bill is due. If you open an account when your child is 9, all other factors being equal, your account balance will be almost $35,000 by the time the first tuition bill is due. The 9-year delay results in a $54,000 deficit in savings.
Once you open an account (regardless of when you do it), the goal is the same: Save, save, save. Based on our sample of Vanguard 529 account owners, 45% made regular contributions until their child turned 18. And an increasing number of these account owners—24% in 2015 versus just 5% in 2004—took advantage of automatic contributions, a feature that can make it easier to save consistently. (The average automatic contribution amount was $178.)
Bottom line: Be the best saver you can be
Knowing how other people are working toward a common goal is interesting, and it can be inspiring too. But at the end of the day, it doesn’t matter how—or how much—your neighbors, friends, and co-workers are saving for college. The only thing that matters is that you’re doing what’s right for your family.
I’d like to give special thanks to my colleagues Kimberly Stockton and Yan Zilbering for their research.
1 Vanguard, 2017. 529 plan savers earn better grades for behavior. Valley Forge, Pa: The Vanguard Group.
2 This assumes a federal marginal income tax rate of 25%, a capital gains tax rate of 15%, and a 4-year draw-down beginning when the beneficiary is 19. This is a hypothetical example that doesn’t represent any particular investment.
3 Sallie Mae. How America Saves for College 2016.
- The availability of tax or other benefits may be contingent on meeting other requirements.
- If you received a tax deduction on your contributions, your state might require you to pay it back if you use the money for expenses that aren’t qualified. Some states also adjust the amount owed for inflation.
- For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.