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.
A trader wears a Trump hat as he works on the floor of the New York Stock Exchange during the opening bell on Nov. 6, 2024.
Timothy A. Clary | Afp | Getty Images
On Nov. 5, the presidential election handed a decisive victory for President-elect Donald Trump. In the days that followed, the markets soared.
A “Trump trade” led to new index highs for the S&P 500 and Dow Jones Industrial Average, lifted with the help of certain sectors expected to do well under the president-elect’s second term.
As of Monday, the postelection market fervor had started to subside to preelection levels.
Yet, some experts say they are seeing a renewal of so-called animal spirits.
“Animal spirits” is a term first coined by economist John Maynard Keynes and refers to the tendency for human emotion to drive investment gains and losses.
Some experts say animal spirits are a sign of consumer confidence. However, the phenomenon can also be trouble for investors if they take on “excessive risk,” said Brad Klontz, a psychologist and certified financial planner.
“It’s essentially why dead investors outperform living investors, because dead investors are not impacted by their animal spirits,” Klontz said.
Research has shown dead investors’ portfolios tend to outperform, since they are left untouched because they are less likely to be influenced by emotional decisions, such as panic selling or buying.
Investors may be excited or fearful
The recent market runup was not prompted by individual investors chasing the market to a meaningful extent, according to Scott Wren, senior global market strategist at Wells Fargo. Individuals, who were split in their election choices, are also divided in their investment outlook, he said.
“Depending on who your candidate was, you may be excited about the future or fearing the future,” Wren said.
Instead, it has been professional traders and money managers — who couldn’t sit on cash when the S&P 500 index was setting new records every two or three days — who have helped drive the markets higher, he said.
There is also big-picture excitement going into 2025, according to Wren, with expectations for lower taxes, less regulation and reasonable levels of inflation. However, the U.S. economy might have a couple of quarters of slower growth in 2025, he said.
“We’re not going to have a recession,” Wren said. “We think that’s very unlikely.”
‘Nobody is immune’ to investing missteps
Ideally, investors ought to sell stocks when they are priced high and buy when they are low.
But research consistently finds the opposite tends to happen.
Humans are wired to take on a herd mentality and follow the crowd, which guides our decision-making on everything from who we vote for to how we invest, according to Klontz.
“The first thing is to just recognize that nobody is immune from this,” Klontz said.
Now is the perfect time for investors to make sure they have an asset allocation that is appropriate to their personal risk tolerance and financial goals, he said.
“It’s harder to do when the market’s crashed,” Klontz said.
Additionally, it is important to keep in mind that financial advisors, like all humans, are also susceptible to biases. When seeking financial advice, investors should ask questions such as “What would you do as my advisor if the market went down 50%?” Klontz said.
Good advisors should have systems in place to keep them from making big mistakes, Klontz said. They may have an investment committee or a predetermined approach for how they will act.
Importantly, investors should also be asking themselves the same question, Klontz said. For example, if the market drops 40%, are you OK with your portfolio dropping from $100,000 to $60,000?
“If the answer is no, then you probably shouldn’t be all in stocks,” Klontz said.
However, if you are young enough, a big market drop could be an important opportunity to dollar cost average — or invest a fixed amount of money on a regular basis — and position your money for larger gains when it recovers.
“Most people have a real tough time doing that, which is why advisors can help,” provided they are familiar with behavioral tendencies, Klontz said.
If you still haven’t booked your holiday travel plans, take note: Prices tend to rise the closer you get to the days you’re looking to travel.
To afford holiday trips, about 50% of respondents are cutting back on other expenses while 49% are picking up discounts and deals, according to the 2024 Holiday Travel Outlook by Hopper, a travel site.
Some last-minute holiday travelers are leaning into so-called “Travel Tuesday” — or the Tuesday after Cyber Monday and Black Friday — which falls on Dec. 3 this year.
Search interest for Travel Tuesday rose more than 500% from 2021 to 2023, according to a recent report by McKinsey and Company.
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There’s a reason why shoppers are searching for the term.
Last year, 83% more deals were offered on Travel Tuesday versus Cyber Monday and 92% more than Black Friday, according to Hopper data.
Yet, there may be some limitations on the deals available, experts say.
“The challenge for a lot of people is, ‘Do I wait?'” said Sally French, a travel expert at NerdWallet.
For travelers who are set on specific days and places to visit, the answer might be “no.”
“While airlines and online travel agencies are going to offer flight deals on Travel Tuesday, there is no reason to wait,” said Phil Dengler, co-founder of The Vacationer, a travel platform.
How much you benefit from potential discounts on Travel Tuesday will depend on your flexibility, experts say.
“If you have zero flexibility,” said Hayley Berg, economist at Hopper, then “if you see a good deal before Travel Deal Tuesday, feel free to book it.”
How Travel Tuesday works
People wait in line for security checkpoints ahead of the Thanksgiving holiday at O’Hare International Airport in Chicago, Illinois, U.S. November 22, 2023.
Vincent Alban | Reuters
Similar to Black Friday and Cyber Monday sales, Travel Tuesday deals sometimes begin to roll out before the day itself, said Dengler. They might even stretch into the day after.
Nonetheless, you will typically need to book the flight, hotel stay or cruise trip by the end of the day in order to reap the benefits, he said.
As you shop, make sure to read the fine print in case discounts only apply for certain routes and days, Dengler explained.
Retailers often have a limited stock for Black Friday and Cyber Monday doorbusters. With Travel Tuesday, there may be a limited number of airline seats or hotel rooms, NerdWallet’s French said.
“They’re not going to fly two planes on the same route at the same time,” she said.
‘Be ready’ to book
Travel Tuesday might be better suited for deciding when and where you’ll go for an upcoming vacation in 2025, versus a very specific itinerary home over the holidays.
If you are not flexible on the days and destinations you plan to travel to and you find a flight available at a price you’re comfortable with, “book that trip right now,” French said.
“If you wait until Travel Tuesday, then that deal could be gone,” she said. “You don’t want to wait for Travel Tuesday for it to be sold out.”
In some cases, it doesn’t hurt to book ahead and keep browsing for potential price drops, experts say.
You typically have 24 hours from booking to cancel for a full refund as long, as it’s seven days before a flight’s scheduled departure time, Dengler said. Plus, some airlines don’t have change fees for non-basic economy fares, he said.
If those terms are in your favor, “if you see a better deal on Travel Tuesday, simply cancel your current bookings and book the Travel Tuesday offer,” Dengler said.
On the flip side, if you’re less tied to specific dates and places, but have a general sense of where and when you want to travel, then holding off until discount days may be worthwhile.
“We tend to see the deals do get better and better the closer we are to actual Black Friday or actual Travel Tuesday,” French said.
The biggest takeaway for travelers is to start thinking about what you might want to book, Berg said.
“I really encourage travelers to do that exploration now so that on Travel Deal Tuesday, they can be ready to actually book,” she said.
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