529 Plans Are Suffering

Cheryl Lock

grandparentsSaving up for your kid’s college education has probably taken a back seat in recent years to things like living expenses and putting away for retirement.

At least that’s what recent findings would suggest. According to a report from student-loan lender Sallie Mae, roughly 14% of families with kids under 18 used 529 plans last year. This was the same proportion as in 2010, with one difference—contributions dropped 6% from 2010, with families depositing only an average of $1,770 in 2012.

Investment managers are moving accordingly. Since parents aren’t helping to sock away for their kids’ educations, they’re aiming to draw in the next best thing—grandparents.

In the past few months, many financial-services firms have introduced new programs aimed at encouraging grandparents to open 529 plans for their grandkids.

For example, Franklin Templeton Investments has been conducting 529 plan seminars geared to grandparents. “Grandparents have been identified as a target market for 529 plans,” Joe Hurley, founder of Savingforcollege.com, told Yahoo! Finance.

In a clever move, firms are tracking older clients with on-track retirement savings and hefty estates in the hopes that well-off grandparents will be happy to open accounts for their grandkids.

And it appears to be working. Tobias Henriksson, product manager for 529 plans at Raymond James, told Yahoo! Finance that in recent months he’s noticed new account openings with lump-sum contributions of over $100,000.

Some experts warn against having grandparents open 529s for their grandkids, as a withdrawal from this account can hurt a child’s chances of getting financial aid the following year, among other things. Instead, they recommend grandparents contribute to plans that parents themselves have opened.

  • MSub
  • LSG

    So the article titled “7 Financial Hacks You’ve never heard of” says having Grandparents open 529 actually helps financial aid eligibility. This article contradicts that. Which is it LearnVest?

    • LibbyKane

      Hi there! In 7 Financial Hacks, we mention that you should consult a financial planner before executing this strategy, because there are some complications that arise when you withdraw the money–specifically, the funds will be considered untaxed income when they’re withdrawn, which could damage eligibility for aid the following year. But having grandparents open a 529 is a viable strategy for many families to secure aid the first year or two years of college. The text above has been clarified to reflect that.

  • Brianne

    The problems with 529 plans is that they are different in every state and they require the money to be spent on educational expenses. What if my future children don’t go to college or have it completely paid for with scholarships? I’d rather save the money in a Roth IRA.