Making the case for college savings

College Savings

3 MIN ARTICLE

Help your clients save for their children’s education with talking points addressing these important questions:

How much do I need to save?
What if I can’t afford to save right now?
Can tax-advantaged saving really make a difference?
How can I possibly reach my college savings goals?

Nine out of 10 parents believe college is an investment in their children’s future,^* but with college costs continuing to rise, saving enough can feel like an insurmountable task. Use the following resources to answer common client concerns and demonstrate how a 529 plan can help your clients pursue their college savings goals.

In 2019-2020, the average cost of a year at an in-state public university was approximately $21,950, while a year of private school was more than $49,870.† When you consider a household with multiple children, affording tuition is no small feat.

Talking point you can use with clients:

Note that despite the rising costs, a college degree is more important than ever. Studies show that those with bachelor’s degrees earn 67% more than high school graduates and experience lower unemployment.^ǂ

The average graduate leaves college with around $29,900 of debt.^** Outstanding student debt in the U.S. has swelled to approximately $1.54 trillion, surpassing credit cards ($820 billion) and auto loans ($1.32 trillion).^{† †}When clients consider this fact, the question becomes not “How can I afford to save?” but “How can I afford not to save?”

Talking points you can use with clients:

Explain that by the time today’s newborns are set to enroll in college, four years at an in-state public university will likely cost more than $267,000.^ǂǂ Every little bit helps, and it’s never too early to begin saving for the educational objectives of those you care about.

Starting a savings plan can make a meaningful difference by potentially reducing the amount your client or the account beneficiary may need to borrow to pay for school.

Saving for college with a 529 account can represent an advantage over taxable accounts.

Talking points you can use with clients:

Explain that with a tax-advantaged college savings plan, the money clients withdraw to pay for qualified education expenses like tuition is free from federal and, in many cases, state tax. Tax-advantaged treatment applies to savings used for qualified education expenses. Tax treatment varies. If withdrawals are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.

Explain to clients how a hypothetical investment of $100 per month for 18 years in a tax-free account, with an average return of 6% per year, would have grown to $38,929 (assuming no withdrawals were taken). The same hypothetical investment in a taxable account would have incurred $5,708 in in taxes.^§

By increasing the regular investment amounts, the potential for added growth offers considerable incentive.

Saving for college is often a family affair, with parents, grandparents and even beneficiaries contributing to the goal. Opening a college savings account allows everyone to pitch in.

Talking points you can use with clients:

Explain that while anyone can contribute to a 529, control remains with the account owner.

Grandparents may opt to help grandchildren with larger gifts, which may also have estate planning benefits. Note that those seeking to transfer assets out of their estates can contribute up to $15,000 ($30,000 for married couples) annually toward a loved one’s college education without gift-tax consequences. Under a special election, grandparents can invest up to $75,000 ($150,000 for married couples) at one time by accelerating five years’ worth of investments. For gift-tax purposes, the assets are considered completed gifts, but the grandparents — provided they own the accounts — control the assets and the withdrawals.

SUPPORTING MATERIALS

529 state tax interactive map

College savings calculator

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CollegeAmerica 529 Plans

Published on October 23, 2020

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College Savings

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^* Sallie Mae, How America Pays for College (2020)
^† The College Board (2020). Total Includes tuition, fees, room and board.
^ǂ Bureau of Labor Statistics, "Unemployment Rates and Earnings by Educational Attainment, 2019" (September 1, 2020)
^** https://studentloanhero.com/student-loan-debt-statistics/ (January 2020)
^{† †} Federal Reserve Board of New York, Quarterly Report on Household Debt and Credit (August 2020)
^ǂǂ https://bigfuture.collegeboard.org/pay-for-college/college-costs/college-costs-calculator. (2020) Results are based on the assumption that college costs rise at 6% a year.
^§Assumes a 6% average annual rate of return (compounded monthly) for both investments and a 25% income tax rate. (The typical mutual fund investor falls into the 25% tax bracket.) Example assumes taxes were paid annually out of the account. Your tax rate may vary. Current minimum tax rates on capital gains and dividends could make taxable investment returns higher, thus reducing the difference between the two ending values. Results shown are hypothetical and are not intended to represent an investment in a specific fund. Your investment experience will differ. Regular investing does not ensure a profit or protect against loss. You should consider your willingness to keep investing when share prices are declining.

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.

Regular investing does not ensure a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. Similar information is contained in the CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. CollegeAmerica is distributed by American Funds Distributors, Inc. and sold through unaffiliated intermediaries.

Depending on your state of residence, there may be an in-state plan that provides state tax and other state benefits, such as financial aid, scholarship funds and protection from creditors, not available through CollegeAmerica. Before investing in any state's 529 plan, investors should consult a tax advisor. CollegeAmerica is a nationwide plan sponsored by Virginia529℠.

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

Use of this website is intended for U.S. residents only. Use of this website and materials is also subject to approval by your home office.

American Funds Distributors, Inc., member FINRA.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

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TABLE OF CONTENTS

Talking point you can use with clients:

Talking points you can use with clients:

Talking points you can use with clients:

Talking points you can use with clients:

Related content

CLIENT ACCOUNTS

Recently Viewed Accounts

Select your location

RETURNS

RESOURCES & RESEARCH

MORE OFFERINGS

OUR APPROACH

DEFINED CONTRIBUTION FOCUS FUNDS

EMPLOYER-SPONSORED PLANS

INSIGHTS & RESOURCES

CAPITAL IDEASTM

PRACTICELAB®

CLIENT ACCOUNT SUPPORT

INVESTMENT TOOLS

RETIREMENT PLANS

CLIENT ACCOUNTS

AMERICAN FUNDS WEBSITE ID

RIA INSIDER ID

EMPLOYER-SPONSORED RETIREMENT PLANS

Client Experience

Business Management

Financial Planning

College Savings

TABLE OF CONTENTS

“How much do I need to save?”

Talking point you can use with clients:

“What if I can’t afford to save right now.”

Talking points you can use with clients:

“Can tax-advantaged saving really make a difference?”

Talking points you can use with clients:

“How can I possibly reach my college savings goals?”

Talking points you can use with clients:

Related content

CAPITAL IDEAS^TM

PRACTICELAB^®