Kids and Money: Parents funnel child care credit into college accounts

October 8, 2021


Here are some survey statistics that raised my eyebrows: Nearly 60% of the parents receiving the monthly child care tax credits plan to put the extra income into their children’s college savings accounts.

In addition, the majority of them — 72% — said they will park the money in tax-advantaged, state-sponsored 529 plans. Sliced another way, about 42% of those parents had already established a 529, while 30% said the income from the child tax credits will allow them to open a 529 account.

The College Savings Foundation’s annual college savings survey cites the child care credits as a major factor in this burst of saving for college.

“The message is clear that families are prioritizing savings for their children’s higher education,” Vivian Tsai, chair of the foundation said in a statement. The organization is a trade group for state 529 program managers, financial firms, and other groups that oversee the savings accounts.

While numbers for the recently-completed third quarter are not yet available, ISS Market Intelligence reported 15.3 million individual college savings and prepaid plans held about $464 billion in college savings assets through midyear.

Money in 529s can be withdrawn tax-free to cover a long list of qualified education expenses for college as well as tuition expenses for kindergarten through high school in private, parochial and public schools.

The foundation’s survey — conducted in August — was based on interviews with about 1,000 parents across the country and with different income levels.

The child care credit, part of the federal rescue plan designed to deal with the pandemic, provides payments to many eligible families of $250 a month for each child ages 6 to 17, and $300 a month for each child under age 6. The advance payment, which represents an advance on half of the taxpayer’s expected 2021 credit amount — runs through December.

Undoubtedly, many families have used the money to cover summer utility bills, shore up credit card balances, make car repairs, and to replenish the emergency fund. But catching up on saving for college remains a priority for many families.

According to the survey, 92% of the parents noted that using savings is the “preferred way” to pay college bills, followed by scholarships and grants, and current income. Moreover, 70% of the respondents said they are saving the same or more for college compared to a year ago.

Children are also expected to contribute — at least up to a third of the cost coming from a job, scholarships or other savings.

About two-thirds of the parents surveyed plan to borrow to cover college bills, and nearly 60% said loans would be their primary way to pay for college. Of interest, one-third of the parents surveyed said they or their spouse were currently paying off student loans.

While the survey didn’t delve into this, 529 plans can also be used to pay student loans, up to a $10,000 lifetime limit. This is a great strategy for parents who still have funds in a child’s account that are no longer needed, Tsai said.

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