	Background

		History of 529 Plans

529 plans are a college savings vehicle that originated in the states. In 1996, Congress  enacted Section 529 of the Internal Revenue Code, setting out  requirements that state 529 plans must meet to be exempt from federal  tax. Earnings on contributions  grow tax-deferred. Almost all states offer a college savings plan. Few Families Have 529 Plans and Those Who Do Tend to Be Wealthier

		A Small Percentage of Families Have 529 Plans

According to the 2010 Survey of Consumer Finances (SCF), less than 3  percent of U.S. families had 529 plans or Coverdells, a similar but less  often used education savings account. Based on our analysis of the 2010 SCF, we estimate that the  median financial asset value for families with 529 plans or Coverdells  was about $413,500, which is about twenty-five times the median  financial asset value for families without 529 plans or Coverdells (about  $15,400).retirement assets than other families. States’ 529 Plan Features and Other Factors Can Affect Participation

		Tax Benefits, Fees, and Investment Options Vary Across State 529 Plans

Officials in every state and most experts and representatives we  interviewed identified tax benefits, fees, and investment options as some  of the most important features consumers consider when choosing  whether or not to participate in a 529 plan and, if so, which plan to  choose. Fees among 529 plans vary widely; total annual asset-based fees among  plans nationwide ranged from 0 percent to 1.97 percent for direct-sold  plans and 0 percent to 2.78 percent for advisor-sold plans, as of July  2012. Participation is Affected by Ability to Save and Other Factors, but Some States Have Adopted Strategies to Address Barriers

Families encounter a number of barriers as they consider saving for  college: they may struggle with making saving a priority, and for those  who do plan to save, many do not know 529 plans exist as a savings  option. Families may encounter a variety of barriers saving for college, such as  insufficient income, underestimating the cost of college, and  misconceptions about financial aid availability, but selected states are  taking steps to help address these barriers. An ongoing experiment conducted by the  Center for Social Development also found a positive impact on the  number of 529 plan accounts for families who were automatically  enrolled in a state-owned 529 account with a matching program in  one state. The site encourages  families to save even in small amounts to offset the amount of debt the  family will incur. According to a 2009 Treasury report,  families saving in 529 plans may need to carefully consider whether their  child will go to college because the penalty incurred if the funds are not  used for qualified education expenses may outweigh the tax benefits for  low-income families. Savings in 529 Plans Affect Financial Aid the Same as Other Assets

		Savings in 529 Plans Are Treated Similarly to Other Assets That Are Included When Calculating the Expected Family Contribution

The extent to which savings in 529 plans, or other investments, affect  how much a family is expected to contribute to the cost of college—the  federal expected family contribution (EFC)—generally depends on the  family’s amount of assets. As a  result, the amount of net parental assets, including savings in 529  plans, that can be included in the EFC ranges from 2.64 percent  to 5.64 percent. It is not clear whether the $1.6 billion in federal tax  expenditures that these plans represent strategically targets limited  federal resources. Appendix I: Objectives, Scope, and Methodology

Our review examined: (1) the percentage and characteristics of families  enrolling in 529 plans, (2) the plan features and other factors that affect  participation in 529 plans, and (3) the extent to which savings in 529  plans affect financial aid awards. To answer these research objectives,  we analyzed government data; interviewed state 529 plan officials from  select states as well as industry representatives and academic experts;  reviewed plan documents and analyzed industry data; conducted a  literature review; interviewed federal, state, and institutional financial aid  officials; and reviewed Department of Education (Education) and Internal  Revenue Service (IRS) documents as well as relevant federal laws,  regulations and guidance. We also developed separate estimates  for students who are considered either dependent on their parents or  independent for financial aid purposes.
Why GAO Did This Study

Paying for college is becoming more challenging, partly because of rising tuition rates. A college savings plan can be an option to help meet these costs. To encourage families to save for college, earnings from 529 plans--named after section 529 of the Internal Revenue Code--grow tax-deferred and are exempt from federal income tax when they are used for qualified higher education expenses. In fiscal year 2011, the Department of the Treasury estimated these plans represented $1.6 billion in forgone federal revenue. Managed by states, over one hundred 529 plan options were available to families nationwide as of July 2012. The number of 529 plan accounts and the amount invested in them has grown during the past decade. GAO was asked to describe (1) the percentage and characteristics of families enrolling in 529 plans, (2) plan features and other factors that affect participation in 529 plans, and (3) the extent to which savings in 529 plans affect financial aid awards. GAO analyzed government data, including the SCF. This survey's 529 plan data are combined with Coverdells, so the SCF estimates used in the report include both 529 and Coverdell data. GAO also analyzed National Postsecondary Student Aid Study data; conducted interviews with federal and state officials, industry and academic experts, and state and institutional higher education officials; reviewed 529 plan and Department of Education documents; conducted a literature review; and reviewed relevant federal laws, regulations, and guidance.

What GAO Found

A small percentage of U.S. families saved in 529 plans in 2010, and those who did tended to be wealthier than others. According to the Survey of Consumer Finances (SCF), less than 3 percent of families saved in a 529 plan or Coverdell Education Savings Account (Coverdell)--a similar but less often used college savings vehicle also included in the SCF. While the economic downturn may have reduced income available for education savings, even among those families who considered saving for education a priority, fewer than 1 in 10 had a 529 plan (or Coverdell). Families with these accounts had about 25 times the median financial assets of those without. They also had about 3 times the median income and the percentage who had college degrees was about twice as high as for families without 529 plans (or Coverdells).
States offer consumers a variety of 529 plan features that, along with several other factors, can affect participation. Some of the most important features families consider when choosing a 529 plan are tax benefits, fees, and investment options, according to experts and state officials GAO interviewed. These features can vary across the state plans. For example, in July 2012, total annual asset-based fees ranged from 0 to 2.78 percent depending on the type of plan. 529 plan officials and experts GAO interviewed said participation is also affected by families' ability to save, their awareness of 529 plans as a savings option, and the difficulty in choosing a plan given the amount of variation between plans. Selected states, however, have taken steps to address these barriers. For example, to address families' ability to save, particularly for low-income families, some states have adopted plans that include less risky investments, have low minimum contributions, and match families' contributions.
Savings in 529 plans affect financial aid similarly to a family's other assets. For federal aid, a family's assets affect how much it is expected to contribute to the cost of college. If the amount of those assets exceeds a certain threshold, then a percentage is expected to be used for college costs. For example, for students who are dependent on their parents, the percentage of parental assets, including savings in 529 plans, that the family may be expected to contribute ranges from 2.64 to 5.64 percent. Many states and selected institutions also treat 529 plan savings the same as other family assets. However, a few states provide them with special treatment, such as exempting those funds from their financial aid calculation.

What GAO Recommends

GAO is not making any recommendations in this report.