Connect with us

Personal Finance

Parents boost college savings to avoid crushing student loan debt

Published

on

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.

More from Personal Finance:
FAFSA rollout was ‘a stunning failure,’ college aid expert says
The best private and public colleges for financial aid
More of the nation’s top colleges roll out no-loan policies

“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.”

Is it best to go to college or dive straight into the working world?

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.

Subscribe to CNBC on YouTube.

Continue Reading

Personal Finance

Trump administration loses appeal of DOGE Social Security restraining order

Published

on

A person holds a sign during a protest against cuts made by U.S. President Donald Trump’s administration to the Social Security Administration, in White Plains, New York, U.S., March 22, 2025. 

Nathan Layne | Reuters

The Trump administration’s appeal of a temporary restraining order blocking the so-called Department of Government Efficiency from accessing sensitive personal Social Security Administration data has been dismissed.

The U.S. Court of Appeals for the 4th Circuit on Tuesday dismissed the government’s appeal for lack of jurisdiction. The case will proceed in the district court. A motion for a preliminary injunction will be filed later this week, according to national legal organization Democracy Forward.

The temporary restraining order was issued on March 20 by federal Judge Ellen Lipton Hollander and blocks DOGE and related agents and employees from accessing agency systems that contain personally identifiable information.

More from Personal Finance:
Judge slams Social Security chief for agency shutdown ‘threats’
Social Security changes may impact service, benefit payments
Trump pick to lead Social Security faces questions on DOGE

That includes information such as Social Security numbers, medical provider information and treatment records, employer and employee payment records, employee earnings, addresses, bank records, and tax information.

DOGE team members were also ordered to delete all nonanonymized personally identifiable information in their possession.

The plaintiffs include unions and retiree advocacy groups, namely the American Federation of State, County and Municipal Employees, the Alliance for Retired Americans and the American Federation of Teachers. 

“We are pleased the 4th Circuit agreed to let this important case continue in district court,” Richard Fiesta, executive director of the Alliance for Retired Americans, said in a written statement. “Every American retiree must be able to trust that the Social Security Administration will protect their most sensitive and personal data from unwarranted disclosure.”

The Trump administration’s appeal ignored standard legal procedure, according to Democracy Forward. The administration’s efforts to halt the enforcement of the temporary restraining order have also been denied.

“The president will continue to seek all legal remedies available to ensure the will of the American people is executed,” Liz Huston, a White House spokesperson, said via email.

Fiserv CEO on the nomination to Social Security Commisioner role

The Social Security Administration did not respond to a request from CNBC for comment.

Immediately after the March 20 temporary restraining order was put in place, Social Security Administration Acting Commissioner Lee Dudek said in press interviews that he may have to shut down the agency since it “applies to almost all SSA employees.”

Dudek was admonished by Hollander, who called that assertion “inaccurate” and said the court order “expressly applies only to SSA employees working on the DOGE agenda.”

Dudek then said that the “clarifying guidance” issued by the court meant he would not shut down the agency. “SSA employees and their work will continue under the [temporary restraining order],” Dudek said in a March 21 statement.

Don’t miss these insights from CNBC PRO

Continue Reading

Personal Finance

Most credit card users carry debt, pay over 20% interest: Fed report

Published

on

Julpo | E+ | Getty Images

Many Americans are paying a hefty price for their credit card debt.

As a primary source of unsecured borrowing, 60% of credit cardholders carry debt from month to month, according to a new report by the Federal Reserve Bank of New York.

At the same time, credit card interest rates are “very high,” averaging 23% annually in 2023, the New York Fed found, also making credit cards one of the most expensive ways to borrow money.

“With the vast majority of the American public using credit cards for their purchases, the interest rate that is attached to these products is significant,” said Erica Sandberg, consumer finance expert at CardRates.com. “The more a debt costs, the more stress this puts on an already tight budget.”

More from Personal Finance:
How to spring-clean your finances
Americans are suffering from ‘sticker shock’ — how to adjust
1 in 5 Americans are ‘doom spending’ — how that can backfire

Most credit cards have a variable rate, which means there’s a direct connection to the Federal Reserve’s benchmark. And yet, credit card lenders set annual percentage rates well above the central bank’s key borrowing rate, currently targeted in a range between 4.25% to 4.5%, where it has been since December.

Following the Federal Reserve’s rate hike in 2022 and 2023, the average credit card rate rose from 16.34% to more than 20% today — a significant increase fueled by the Fed’s actions to combat inflation.

“Card issuers have determined what the market will bear and are comfortable within this range of interest rates,” said Matt Schulz, chief credit analyst at LendingTree.

APRs will come down as the central bank reduces rates, but they will still only ease off extremely high levels. With just a few potential quarter-point cuts on deck, APRs aren’t likely to fall much, according to Schulz.

Credit card debt?

Despite the steep cost, consumers often turn to credit cards, in part because they are more accessible than other types of loans, Schulz said. 

In fact, credit cards are the No. 1 source of unsecured borrowing and Americans’ credit card tab continues to creep higher. In the last year, credit card debt rose to a record $1.21 trillion.

Because credit card lending is unsecured, it is also banks’ riskiest type of lending.

“Lenders adjust interest rates for two primary reasons: cost and risk,” CardRates’ Sandberg said.

The Federal Reserve Bank of New York’s research shows that credit card charge-offs averaged 3.96% of total balances between 2010 and 2023. That compares to only 0.46% and 0.43% for business loans and residential mortgages, respectively.

As a result, roughly 53% of banks’ annual default losses were due to credit card lending, according to the NY Fed research.

“When you offer a product to everyone you are assuming an awful lot of risk,” Schulz said.

Further, “when times get tough they get tough for most everybody,” he added. “That makes it much more challenging for card issuers.”

The best way to pay off debt

The best move for those struggling to pay down revolving credit card debt is to consolidate with a 0% balance transfer card, experts suggest.

“There is enormous competition in the credit card market,” Sandberg said. Because lenders are constantly trying to capture new cardholders, those 0% balance transfer credit card offers are still widely available.

Cards offering 12, 15 or even 24 months with no interest on transferred balances “are basically the best tool in your toolbelt when it comes to knocking down credit card debt,” Schulz said. “Not accruing interest for two years on a balance is pretty hard to argue with.”

Subscribe to CNBC on YouTube.

Continue Reading

Personal Finance

The 60/40 portfolio may no longer represent ‘true diversification’: Fink

Published

on

Andrew Ross Sorkin speaks with BlackRock CEO Larry Fink during the New York Times DealBook Summit in the Appel Room at the Jazz at Lincoln Center in New York City on Nov. 30, 2022.

Michael M. Santiago | Getty Images

It may be time to rethink the traditional 60/40 investment portfolio, according to BlackRock CEO Larry Fink.

In a new letter to investors, Fink writes the traditional allocation comprised of 60% stocks and 40% bonds that dates back to the 1950s “may no longer fully represent true diversification.”

“The future standard portfolio may look more like 50/30/20 — stocks, bonds and private assets like real estate, infrastructure and private credit.” Fink writes.

Most professional investors love to talk their book, and Fink is no exception. BlackRock has pursued several recent acquisitions — Global Infrastructure Partners, Preqin and HPS Investment Partners — with the goal of helping to increase investors’ access to private markets.

More from Personal Finance:
Why uncertainty makes the stock market go haywire
Investors are ‘miles ahead’ if they avoid 3 things, CIO says
How investors can ready their portfolios for a recession

The effort to make it easier to incorporate both public and private investments in a portfolio is analogous to index versus active investments in 2009, Fink said.

Those investment strategies that were then considered separately can now be blended easily at a low cost.

Fink hopes the same will eventually be said for public and private markets.

Yet shopping for private investments now can feel “a bit like buying a house in an unfamiliar neighborhood before Zillow existed, where finding accurate prices was difficult or impossible,” Fink writes.

60/40 portfolio still a ‘great starting point’

After both stocks and bonds saw declines in 2022, some analysts declared the 60/40 portfolio strategy dead. In 2024, however, such a balanced portfolio would have provided a return of about 14%.

“If you want to keep things very simple, the 60/40 portfolio or a target date fund is a great starting point,” said Amy Arnott, portfolio strategist at Morningstar.

If you’re willing to add more complexity, you could consider smaller positions in other asset classes like commodities, private equity or private debt, she said.

However, a 20% allocation in private assets is on the aggressive side, Arnott said.

The total value of private assets globally is about $14.3 trillion, while the public markets are worth about $247 trillion, she said.

For investors who want to keep their asset allocations in line with the market value of various asset classes, that would imply a weighting of about 6% instead of 20%, Arnott said.

Yet a 50/30/20 portfolio is a lot closer to how institutional investors have been allocating their portfolios for years, said Michael Rosen, chief investment officer at Angeles Investments.

BlackRock CEO Larry Fink: Infrastructure will be the largest growing sector in private capital

The 60/40 portfolio, which Rosen previously said reached its “expiration date,” hasn’t been used by his firm’s endowment and foundation clients for decades.

There’s a key reason why. Institutional investors need to guarantee a specific return, also while paying for expenses and beating inflation, Rosen said.

While a 50/30/20 allocation may help deliver “truly outsized returns” to the mass retail market, there’s also a “lot of baggage” that comes with that strategy, Rosen said.

There’s a lack of liquidity, which means those holdings aren’t as easily converted to cash, Rosen said.

What’s more, there’s generally a lack of transparency and significantly higher fees, he said.

Prospective investors should be prepared to commit for 10 years to private investments, Arnott said.

And they also need to be aware that measurement issues with asset classes like private equity means past performance data may not be as reliable, she said.

For the average person, the most likely path toward tapping into private equity will be part of a 401(k) plan, Arnott said. So far, not a lot of companies have added private equity to their 401(k) offerings, but that could change, she said.

“We will probably see more plan sponsors adding private equity options to their lineups going forward,” Arnott said.

Don’t miss these insights from CNBC PRO

Continue Reading

Trending