How wealthy parents save for college

(MoneyWatch) A small percentage of American families are saving for college through so-called 529 college savings plans, and the parents who are embracing these accounts tend to be wealthier.

According to a new study by the U.S. Government Accountability Office, less than 3 percent of families are saving for college through 529 accounts or Coverdell Education Savings Accounts, which provides owners with generous tax benefits.

Of the 25 percent of families that expect major education expenses in the next five to 10 years, roughly seven percent of them possess 529 plans or Coverdell Education Savings Accounts. What's more, of the 18 percent of families who reported that saving for an education was a priority, only 9 percent have one of these college accounts, according to the GAO report, which drew on data from the 2010 Survey of Consumer Finances and other sources.

The GAO cites Sallie Mae survey that suggests that most families who are saving for college are doing so in general savings accounts or certificates of deposits.

Parents save an average of $14,700 in 529 plans or Coverdell accounts.

Paul Curley, director of college savings research with the Financial Research Corp., notes that usage of 529 plans appears more widespread if you eliminate families that don't have children under the age of 18. Fifteen percent of families with these younger children save through 529 plans, and the number would rise further if the cohort only included parents that expect their children to attend college.

According to the GAO, families that save for college through 529 plans or Coverdells are much wealthier than most Americans. The median annual income for families with these accounts is $142,400, or about three times the median income of families that don't save using these tax-preferred vehicles.

The GAO estimates that the median financial asset value for college account owners is roughly $413,500. This is about 25 times what it is for other families. Ninety-four percent of parents saving through these college plans have retirement accounts, while just 49 percent of other families have retirement assets.

What does it mean that wealthier families are far more likely to take advantage of a 529 plan? Among other things, that the financial industry is more interested in cultivating high net worth customers than trying to persuade Americans to save for college.

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529 plans are assisting a broad spectrum of families of all income levels as they navigate a path to planning and saving for higher education. To draw a conclusion that 529 plans don't care about low and moderate income families and cater only to "high net worth" customers is wrong and unfair. In fact, many 529 plans offer matching grant programs and various types of scholarship programs to encourage low and moderate income families to participate in their programs. They also are active in financial literacy initiatives across their states. Most also offer low cost and low initial balance investment options to encourage broad participation. For example, the plan I am proud to be associated with, Virginia529, is in the third year of a pilot early commitment scholarship program, SOAR Virginia, offered in partnership with college access providers across Virginia and available to low and moderate income students. In addition, Virginia529 participates in a number of financial literacy initiatives and has worked with the Virginia Departmetn of Education to develop and offer a Personal Finance and Economics high school online curriculum, without cost, to every high school in Virginia. This is in addition to offering a wide variety of 529 investment options, with opening balances as low as $25 and with low fees (CollegeWealth for example offers FDIC-insured bank savings accounts with an opening balance of $25 and no activation, annual or administrative fees.