Graduation season is underway and for many families, it’s a reminder of just how quickly children grow up and head off to college. Fortunately, parents can start preparing for higher education expenses well before their children leave for school. On May 29, we recognized 529 Day to encourage participation in Kentucky’s 529 college savings plan, the Kentucky Education Savings Plan Trust (KESPT).
The General Assembly created the Trust more than 25 years ago to help families plan for future college expenses. Since that time, the Plan has helped nearly 4,000 students achieve their dreams of going to college, with more than $63 million used to fund higher education expenses. Today, KESPT serves 6,700 Kentucky families.
That’s a small percentage, however, of parents who are working hard across the Commonwealth to secure a bright future for their children. That’s why we are in support of additional college savings incentives, such as a state income tax deduction for contributions into KESPT.
Families who set aside money for college find that it’s far less expensive to save than it is to borrow. And those benefits extend beyond the home. Imagine the long-term economic impact of having more college graduates with greater earning potential and fewer families struggling to pay back debt and interest fees.
Unfortunately, students across the country are graduating with increasing student loan debt every year. According to a report released by the Federal Reserve Bank of New York last year, student loan debt surpassed credit card debt in 2010 to become the second largest form of household debt after mortgages. The average debt per borrower and the number of borrowers both increased by 70 percent from 2004 to 2012, to $25,000 and 39 million, respectively.
One possible reason for the increased dependence on student loans and the relatively low participation in 529 plans is a lack of awareness. The Kentucky College Savings Report, administered by ORC International and sponsored by KESPT in 2013, found that while 82 percent of Kentucky parents consider saving for college a priority, only two-thirds are familiar with 529 plans.
There is also a misconception that college savings plans are just for the wealthy. Yet a 2014 survey conducted for the College Savings Foundation found that working families are the main users of 529 plans, with 57 percent of those families having household incomes below $100,000.
Families can open a KESPT account with as little as $25. If an employer allows payroll deduction, the minimum contribution drops to just $15 per pay period.
Besides offering an affordable way to save for college, 529 plans offer flexibility since funds can be used for more than just tuition. For example, a 529 plan can pay for any required cost of attendance such as books, computers, and certain room and board expenses. Plus, a 529 plan, including KESPT, can be used nationwide at not only four-year colleges, but also accredited two-year colleges, technical schools and graduate schools.
Whether you are a new parent opening a 529 plan account for an infant or a grandparent helping grandkids with regular contributions, planning for college at any age makes good financial sense. Earnings in a 529 plan are free from federal and state income tax when withdrawals are used for qualified education expenses. So the earlier a family starts saving, the more time the money has to grow tax-free.
KESPT savings are not included in determining the amount of Kentucky need-based aid that a beneficiary will receive.
As a former Kentucky state representative, House Education Committee chair and current executive director of the Kentucky Higher Education Assistance Authority, I am committed to fostering a college-going culture in Kentucky. If we are going to improve access to higher education for students, we must help families prepare for the financial obligations.
I encourage you to consider the benefits of a KESPT college savings account today. For more information, call 877-598-7878 or visit kysaves.com.
Dr. Carl P. Rollins is the executive director of the Kentucky Higher Education Assistance Authority.