Data & Research July 28, 2014

College Debt Spurs Parents Toward 529s

Advisers can help plan participants work out how to save for a child’s college education as well as their own retirement. 
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Spiraling college costs and student debt are powerful motives for parents to invest in tax-advantaged 529 college savings plans, according to a report by Strategic Insight, an Asset International company.

Almost three-quarters of 2014 college graduates (more than 70%) are leaving school with student loans, and the average loan debt is about $33,000, according to Paul Curley, director of college savings research at Strategic Insight. “In our most recent survey, nearly 60% of the consumers who are currently saving to help pay for their children’s education said concern about the family going into debt was an important factor in their decision to do so,” he says.

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The fear of debt motivates people to save, according to Strategic Insight’s report, “529 Industry Analysis, 2014,” but 29% of consumers who are not currently putting money aside for education said they are counting on scholarships and financial aid to cover those costs. That may be unreasonable, though, because growth in college enrollments has outstripped increases in financial aid. As a result, per-student aid levels to help finance post-secondary education have not filled the affordability gap, compounding student loan debt growth.

Curley tells PLANADVISER he often recommends parents step up contributions to a 529 college savings plan to fill the funding gap, but this can be challenging for families torn between competing financial goals. 

The temptation to address the financial concern that is looming in the short-term is understandable, says James Holland, director of business development for MillenniuM Investment and Retirement Advisors in Charlotte, North Carolina.

But the cost of waiting to save for college is so significant, there has to be a happy medium, Holland tells PLANADVISER. Investors and plan participants should be made aware of the effect of compounding and the cost of waiting, Holland says, which are dramatic. There are other ways of getting money for college, he says, “but what other ways are there of getting money for retirement?”

Saving in a 529

Another solution is for employers to support plan participants with payroll deductions, education on savings vehicles and matching contributions, Curley says. Overall, 8% of employers surveyed offer a 529 college savings plan, according to data from PLANSPONSOR’s 2014 Plan Benchmark Report.

“Providers and distributors of 529 college savings plans should encourage families to plan to pay for at least some of college from their own funds,” Curley says. “Even small investments, building tax-deferred in a 529 over time, can help reduce the debt that students and their families will have to incur.”

Holland recommends trying to strike a balance. Instead of ending contributions to a retirement savings plan, even temporarily, perhaps the payments can be split equally between the two plans, he says. “Maybe $50 to each,” he says. “I wouldn’t have it be all or nothing.”

“529 Industry Analysis, 2014” is Strategic Insight’s 10th in-depth research study on 529 plans since 2002. This is the third consecutive year that the company has conducted a consumer survey regarding 529 plans. The study, available on Strategic Insight’s website, is based on a March 2014 survey of more than 1,000 consumers, and explores why parents save for their children’s college expenses and which investment vehicles they use.

Strategic Insight provides business intelligence for the mutual fund industry.

Compliance July 28, 2014

No Change to Social Security Depletion Date

The Social Security Board of Trustees reports the combined asset reserves of the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds are projected to become depleted in 2033.
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This is unchanged from the last two years, with 77% of benefits still payable at that time. The DI Trust Fund will become depleted in 2016, also unchanged from last year’s estimate, with 81% of benefits still payable.

The combined trust fund reserves are still growing and will continue to do so through 2019. Beginning with 2020, the cost of the program is projected to exceed income. The projected actuarial deficit over the 75-year long-range period is 2.88% of taxable payroll—0.16 percentage point larger than in last year’s report.

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“The projected depletion dates of the Social Security Trust Funds have not changed, and three-fourths of benefits would still be payable after depletion. But the fact remains that Congress can ensure the long-term solvency of this vital program by taking action,” says Carolyn W. Colvin, Acting Commissioner of Social Security. “The Disability Insurance Trust Fund’s projected depletion year remains 2016, and legislative action is needed as soon as possible to address this financial imbalance.”

Other highlights of the Trustees Report include:

  • Income including interest to the combined OASDI Trust Funds amounted to $855 billion in 2013. ($726 billion in net contributions, $21 billion from taxation of benefits, $103 billion in interest, and $5 billion in reimbursements from the General Fund of the Treasury—almost exclusively resulting from the 2012 payroll tax legislation);
  • Total expenditures from the combined OASDI Trust Funds amounted to $823 billion in 2013;
  • Non-interest income fell below program costs in 2010 for the first time since 1983. Program costs are projected to exceed non-interest income throughout the remainder of the 75-year period;
  • The asset reserves of the combined OASDI Trust Funds increased by $32 billion in 2013 to a total of $2.76 trillion;
  • During 2013, an estimated 163 million people had earnings covered by Social Security and paid payroll taxes;
  • Social Security paid benefits of $812 billion in calendar year 2013. There were about 58 million beneficiaries at the end of the calendar year;
  • The cost of $6.2 billion to administer the program in 2013 was a very low 0.7% of total expenditures; and
  • The combined Trust Fund asset reserves earned interest at an effective annual rate of 3.8% in 2013.

The 2014 Trustees Report is available atwww.socialsecurity.gov/OACT/TR/2014/.

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