When Ben DiFilippi graduates from college next month, he's going to be debt-free.
With merit scholarships and the college savings his parents stashed away in 529 plans, DiFilippi and his family have been able to cover the entire price tag for his undergraduate education at Clark University in Worcester, Massachusetts.
"We're going to be celebrating both his academic achievement and our achievement as a family in preparing for the cost of it," said his mother, Patricia Roberts.
Many financial advisors recommend a 529 plan as a way to earmark a savings account specifically for education costs. Yet a new survey shows nearly two-thirds of Americans cannot correctly identify a 529 plan as an education savings tool — and only one-fifth of U.S. parents report they have saved, or are planning to save, for their children's education — or their own — using a 529 plan.
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As total student loan debt in the U.S. has surpassed $1.7 trillion and the average cost of attending a private college jumped to $37,650 for the 2020-21 school year, there seems to be a disconnect for many parents between the cost of higher education and how to pay for it, experts say.
"Some people are reaching the end of their lives still not sure how to pay [student loan debt] back, and ... many people are unfamiliar with one of the most effective ways to save," said Roberts, author of "Route 529: A Parent's Guide to Saving for College and Career Training with 529 Plans."
With a 529 savings plan, 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 such as tuition, fees, books and room and board. Plus, you often will get a state tax deduction or credit for contributions.
Those aren't the only reasons many parents find a 529 plan a good way to save for college. Reducing the amount of money students will have to borrow to pay for college is a big consideration.
Figure out your reason for saving before you begin putting money away, Roberts said. "Start with your 'why,'" she said. "We started with our desire to have a better outcome for our son than we had.
"We borrowed over $100,000 for our undergraduate and law school degrees, and it took us more than 20 years to pay that back."
Roberts and her husband, Anthony DiFilippi, started funding a 529 plan for Ben — now 21 — when he was a baby. "We knew firsthand what it felt like to be having to pay back that money," she said. "We really felt so strongly that we did not want the same experience to be what our son encountered."
How did they crack the code to be able to save regularly?
As soon as Roberts returned from maternity leave to her job at a financial services company, the couple started making regular contributions to a 529 account with each paycheck "We adjusted our lifestyle," said Roberts, who has driven the same car for over 20 years. "As a family, we looked at our expenses, and we realized how much we could save had an awful lot to do with what we were spending."
A lot of people are not aware that 529 plans can not only be used for college expenses, but also private school.Lazetta Braxtonco-founder of 2050 Wealth Partners
Many families may now be making the same calculations. Contributions to 529 plans have risen more than 11% in the past year to about $11 billion, according to researcher Paul Curley at ISS Market Intelligence. With stock market gains, overall 529 plan assets surged nearly 35% to more than $412 billion from the first quarter of 2020 to the first quarter of 2021.
In 2021, an individual can contribute up to $15,000 per beneficiary to a 529 plan without paying gift taxes. Every dollar helps. Curley said saving $100 a month over 18 years can result in a balance of over $31,000.
Enhancements to 529 plans — including expansion of covered educational expenses — "are helping more and more families to save and save efficiently for the long-term goal of education through this short-term volatility during the pandemic," Curley said.
New York-based certified financial planner Lazetta Braxton, co-founder of 2050 Wealth Partners, agrees. "During the pandemic, we couldn't travel, couldn't eat out a lot," she said. "That's a lot of savings that can be redeployed to goals, and education often comes to the forefront."
While building education savings as early as possible is important, it is also wise to plan for how to spend those funds, Braxton said. "A lot of people are not aware that 529 plans can not only be used for college expenses, but also private school."
In addition to graduate studies, apprenticeships, career and technical schools, up to $10,000 a year of 529 plan funds can be used for K-12 private school education. Also, as much as $10,000 — that's the lifetime limit — can be used to pay off qualified student loans.
Many families will have to use a mix of income, savings, grants and scholarships as well as loans to pay for college. To get a head start in figuring out what the mix will look like for your child, financial advisors say to start with a budget that includes what the total college bill will likely be for four years as well as all of the resources you have to cover that cost.
Several online college savings calculators — including those on the SavingforCollege, T. Rowe Price and Vanguard websites — can help you figure out what your shortfall may be and how much you would need to save — or borrow — to bridge that gap.
In the end, saving in a 529 plan to cover as much of the cost as possible is the ultimate goal.
"Ben is graduating with $0 in debt," Roberts said. And she hasn't stopped putting money away in a 529 plan. "I still contribute — we know graduate school is around the corner."
CNBC's Erica Wright produced the video in this story.
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