Personal Finance
Parents boost college savings to avoid crushing student loan debt
Kathryn Bracho, 48, with her husband, Michael, and their two sons, Declan and Taran.
Courtesy: Kathryn Bracho
With federal student loan forgiveness in jeopardy and the rising cost of college now a top concern for students and their families, more Americans are prioritizing saving for higher education.
In 2024, 74% of parents surveyed have started putting money away for college, according to Fidelity’s College Savings Indicator — a spike from 58% in 2007, when the study was first conducted. Fidelity polled nearly 2,000 families with children high school age and younger between April and May.
“My husband and I just kept hearing from people with older kids about just how expensive college is,” said Kathryn Bracho, 48, who lives in Green Bay, Wisconsin.
Bracho and her husband, Michael, started contributing to college savings accounts in 2017 so their sons — Declan, 15, and Taran, 12 — would have options after high school, she said.
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“I don’t know that we have as much as we had hoped, but just the fact that we’ve been steadily contributing gives me a certain degree of reassurance,” she said. “They’ll have to take out some loans but it hopefully won’t be that crushing burden.”
To be sure, sky-high costs and concerns over ballooning student loan balances have weighed heavily on considerations about college for students and their parents.
“Families are beginning to row together in the same direction and realize the value of higher education and what they want to get out of higher education,” said Chris McGee, chair of the College Savings Foundation, a nonprofit that provides public policy support for 529 plans.
“Nobody wants to be part of the $1.7 trillion,” McGee said, referencing the total amount of outstanding student loan debt.
How savings plays into covering college costs
David Ochs, a physician in Richmond, Virginia, owed $315,000 in education loans by the time he finished his residency. “It’s been miserable,” the 39-year-old said.
Now as the father of two sons, ages 1 and 5, Ochs said he started saving for their college educations soon after they were born because he didn’t want them to experience the same hardship. “All of a sudden your life is all about trying to get out of a strangling debt.”
Still, contributing to their 529 plans has necessitated sacrifices such as forgoing extra payments toward his student loans, he added. “I think it’s a gesture of love.”
Among the 94% of parents funding their children’s higher education, almost half say that savings is their primary way of paying the tab, a new report by the College Savings Foundation found. The annual State of Higher Ed Savings survey polled more than 1,000 parents of children age 25 and younger in July.
For the first time in the College Savings Foundation survey’s history, more than half of all parents said they are tapping a 529 college savings plan.
In 2024, total investments in 529s jumped to $450.5 billion in June, up nearly 10% from $412.5 billion the year before, according to data from College Savings Plans Network, a network of state-administered college savings programs.
Financial experts and plan investors agree that 529 plans are a smart choice for many. And yet, in previous years, data shows that regular contributions to a 529 college savings plan often took a back seat to paying more pressing bills or daily expenses.
Even now, parents hope to use savings to pay for 67% of their child’s education, but only 30% are on track to hit that goal, Fidelity found.
“A college education is still valuable, but it’s the lack of planning that’s a little bit alarming,” said Tony Durkan, a vice president and head of 529 relationship management at Fidelity Investments.
The benefits of a 529 college savings plan
Among other recent changes, higher contribution limits and the flexibility to roll unused money into a Roth individual retirement account free of income tax or tax penalties have helped boost interest, McGee said.
The restrictions around 529s have also loosened to include continuing education classes, apprenticeship programs and even student loan payments.
“The legislative updates that have come through have certainly broken down barriers to entry to 529 plans,” Fidelity’s Durkan said.
Here’s a closer look at some of the changes:
New Roth IRA rollover rules
Thanks to Secure 2.0, as of 2024, families can roll over unused 529 plan funds to the account beneficiary’s Roth IRA without triggering income taxes or penalties. Among other qualifications, the 529 plan must have been open for at least 15 years.
That change follows the Secure Act of 2019, which let 529 users put some of the funds toward their student loan tab: up to $10,000 per year for each plan beneficiary, as well as another $10,000 for each of the beneficiary’s siblings.
Previously, tax-advantaged withdrawals were limited to qualified education expenses, such as tuition, fees, books, and room and board. Now, 529s offer much more flexibility, even for those who never go to college, Chris Lynch, president of tuition financing at TIAA, told CNBC last year.
In that case, you could transfer the funds to another beneficiary or withdraw them and pay taxes and a penalty on the earnings. If your student earns a scholarship, you can typically withdraw up to the amount of the scholarship penalty-free.
Higher maximum contribution limits
This year, parents can gift up to $18,000, or up to $36,000 if you’re married and file taxes jointly, per child without those contributions counting toward your lifetime gift tax exemption. That’s up from $17,000 and $34,000 for married couples filing jointly in 2023.
High-net-worth families that want to help fund a family member’s higher education could also consider “superfunding” 529 accounts, which allows frontloading five years’ worth of tax-free gifts into a 529 plan.
In this case, you could contribute up to $90,000 this year, or $180,000 for a married couple. But then you wouldn’t be able to give more money to that same recipient within a five-year period without it counting against your lifetime gift tax exemption.
A larger lump-sum contribution upfront may potentially generate more earnings compared with the same size contribution spread out over a few years because it has a longer time horizon, according to Fidelity.
New grandparent ‘loophole’
A new simplified Free Application for Federal Student Aid rolled out at the end of last year, with added benefits for grandparents who own 529 accounts for their grandchildren.
Under the old FAFSA rules, assets held in grandparent-owned 529 college savings plans were not reported on the FAFSA form, but distributions from those accounts counted as untaxed student income, which could reduce aid by up to half of that income.
As part of the FAFSA simplification, students no longer have to answer questions about contributions from a grandparent, effectively creating a “loophole” for grandparents to save for a grandchild’s college without impacting their financial aid eligibility.
Tax deductions or credits for contributions
Even before recent changes, there were already many advantages to a 529 plan. In more than half of all U.S. states, you can get a tax deduction or credit for contributions. Earnings grow on a tax-advantaged basis, and when you withdraw the money, it is tax-free if the funds are used for qualified education expenses.
A few states also offer additional benefits, such as scholarships or matching grants, to their residents if they invest in their home state’s 529 plan.
Rockaa | E+ | Getty Images
Many Americans are anxious and confused when it comes to saving for retirement.
One of those pain points: How much should households be setting aside to give themselves a good chance at financial security in older age?
More than half of Americans lack confidence in their ability to retire when they want and to sustain a comfortable life, according to a 2024 poll by the Bipartisan Policy Center.
It’s easy to see why people are unsure of themselves: Retirement savings is an inexact science.
“It’s really a hard question to answer,” said Philip Chao, a certified financial planner and founder of Experiential Wealth, based in Cabin John, Maryland.
“Everyone’s answer is different,” Chao said. “There is no magic number.”
Why?
Savings rates change from person to person based on factors such as income and when they started saving. It’s also inherently impossible for anyone to know when they’ll stop working, how long they’ll live, or how financial conditions may evolve — all of which impact the value of one’s nest egg and how long it must last.
That said, there are guideposts and truisms that will give many savers a good shot at getting it right, experts said.
15% is ‘probably the right place to start’
“I think a total savings rate of 15% is probably the right place to start,” said CFP David Blanchett, head of retirement research at PGIM, the asset management arm of Prudential Financial.
The percentage is a share of savers’ annual income before taxes. It includes any money workers might get from a company 401(k) match.
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Those with lower earnings — say, less than $50,000 a year — can probably save less, perhaps around 10%, Blanchett said, as a rough approximation.
Conversely, higher earners — perhaps those who make more than $200,000 a year — may need to save closer to 20%, he said.
These disparities are due to the progressive nature of Social Security. Benefits generally account for a bigger chunk of lower earners’ retirement income relative to higher earners. Those with higher salaries must save more to compensate.
“If I make $5 million, I don’t really care about Social Security, because it won’t really make a dent,” Chao said.
How to think about retirement savings
Daniel De La Hoz | Moment | Getty Images
Households should have a basic idea of why they’re saving, Chao said.
Savings will help cover, at a minimum, essential expenses such as food and housing throughout retirement, which may last decades, Chao said. Hopefully there will be additional funds for spending on nonessential items such as travel.
This income generally comes from a combination of personal savings and Social Security. Between those sources, households generally need enough money each year to replace about 70% to 75% of the salaries they earned just before retirement, Chao said.
There is no magic number.
Philip Chao
CFP, founder of Experiential Wealth
Fidelity, the largest administrator of 401(k) plans, pegs that replacement rate at 55% to 80% for workers to be able to maintain their lifestyle in retirement.
Of that, about 45 percentage points would come from savings, Fidelity wrote in an October analysis.
To get there, people should save 15% a year from age 25 to 67, the firm estimates. The rate may be lower for those with a pension, it said.
The savings rate also rises for those who start later: Someone who starts saving at 35 years old would need to save 23% a year, for example, Fidelity estimates.
An example of how much to save
Here’s a basic example from Fidelity of how the financial calculus might work: Let’s say a 25-year-old woman earns $54,000 a year. Assuming a 1.5% raise each year, after inflation, her salary would be $100,000 by age 67.
Her savings would likely need to generate about $45,000 a year, adjusted for inflation, to maintain her lifestyle after age 67. This figure is 45% of her $100,000 income before retirement, which is Fidelity’s estimate for an adequate personal savings rate.
Since the worker currently gets a 5% dollar-for-dollar match on her 401(k) plan contributions, she’d need to save 10% of her income each year, starting with $5,400 this year — for a total of 15% toward retirement.
However, 15% won’t necessarily be an accurate guide for everyone, experts said.
“The more you make, the more you have to save,” Blanchett said. “I think that’s a really important piece, given the way Social Security benefits adjust based upon your historical earnings history.”
Keys to success: ‘Start early and save often’
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There are some keys to general success for retirement, experts said.
- “Start early and save often,” Chao said. “That’s the main thing.” This helps build a savings habit and gives more time for investments to grow, experts said.
- “If you can’t save 15%, then save 5%, save whatever you can — even 1% — so you get in the habit of knowing you need to put money away,” Blanchett said. “Start when you can, where you can.”
- Every time you get a raise, save at least a portion instead of spending it all. Blanchett recommends setting aside at least a quarter of each raise. Otherwise, your savings rate will lag your more expensive lifestyle.
- Many people invest too conservatively, Chao said. Investors need an adequate mix of assets such as stocks and bonds to ensure investments grow adequately over decades. Target-date funds aren’t optimal for everyone, but provide a “pretty good” asset allocation for most savers, Blanchett said.
- Save for retirement in a tax-advantaged account like a 401(k) plan or an individual retirement account, rather than a taxable brokerage account, if possible. The latter will generally erode more savings due to taxes, Blanchett said.
- Delaying retirement is “the silver bullet” to make your retirement savings last longer, Blanchett said. One caution: Workers can’t always count on this option being available.
- Don’t forget about “vesting” rules for your 401(k) match. You may not be entitled to that money until after a few years of service.
Israel Sebastian | Moment | Getty Images
The fourth-quarter estimated tax deadline for 2024 is Jan. 15, and missing a payment could trigger “unexpected penalties and fees” when filing your return, according to the IRS.
Typically, estimated taxes apply to income without withholdings, such as earnings from freelance work, a small business or investments. But you could still owe taxes for full-time or retirement income if you didn’t withhold enough.
You could also owe fourth-quarter taxes for year-end bonuses, stock dividends, capital gains from mutual fund payouts or profits from crypto sales and more, the IRS said.
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Federal income taxes are “pay as you go,” meaning the IRS expects payments throughout the year as you make income, said certified public accountant Brian Long, senior tax advisor at Wealth Enhancement in Minneapolis.
If you miss the Jan. 15 deadline, you may incur an interest-based penalty based on the current interest rate and how much you should have paid. That penalty compounds daily.
Tax withholdings, estimated payments or a combination of the two, can “help avoid a surprise tax bill at tax time,” according to the IRS.
What to know about the ‘safe harbor’ rules
One way to avoid penalties is by following the “safe harbor” rule, which means “you’re meeting that [IRS] pay-as-you-go requirement,” according to Long.
To satisfy the rule, you must pay at least 90% of your 2024 tax liability or 100% of your 2023 taxes, whichever is smaller.
The threshold increases to 110% if your 2023 adjusted gross income was $150,000 or higher, which you can find on line 11 of Form 1040 from your 2023 tax return.
However, you could still owe taxes for 2024 if you make more than expected and don’t adjust your tax payments.
“The good thing about this last quarterly payment is that most individuals should have their year-end numbers finalized,” said Sheneya Wilson, a CPA and founder of Fola Financial in New York.
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