529 College Savings Plans Reach New Highs

The college savings plan market totaled $329 billion in assets across both 529 savings and prepaid plans as of the end of June 2018. 529 savings plans crossed the $300 billion threshold over the quarter, reaching $305 billion from $297 billion in 1Q’18 and $276 billion in 2Q’17. The market has experienced strong, consistent rates of annualized growth of 12% between 2Q’16 and 2Q’18 and 10% from 2Q’17 to 2Q’18. The industry’s consistent growth has continued so strongly through the last eleven quarters that it has even increased during the third quarter of the year. (This is when investors typically withdraw funds to pay for college.) 529 prepaid plans have seen much more muted growth, seeing assets nearly unchanged between the 2Q’18 ($24.3 billion) and 1Q’18 ($24.2 billion). As prepaid plans allocate market risk to the sponsoring state entity, they are a potentially larger burden on states and have been slower to expand.

Net flows remained strong in 2Q’18 at $3.8 billion. While this was down slightly from $4.0 billion in the first quarter, it represented higher net new flows than any other period over the past two years. The industry’s net new flows over the past 12 months ending in June 2018 ($8.6 billion) represent a strong improvement over the flows for preceding 12 months ($7.6 billion). When 529 do experience periods of net redemptions, they are almost entirely limited to the third quarter of each year and are related to the core usage of the savings vehicle.

On a distribution front, 529 savings plans have grown most strongly within the direct channel. Over the past year ending in June 2018, the direct channel grew 12.0% compared to 8.2% for the advisor channel. The direct channel has steadily increased market share, thanks to increased awareness and understanding of 529 plans beyond intermediary channels.

The future for 529 savings plans also looks bright on the legislative front. In July 2018, the House Ways and Means Committee released the “House GOP Listening Session Framework, Tax Reform 2.0.” 529 savings plans were referenced in the document as, “Expanded 529 Education accounts. Building upon the improvements in the Tax Cuts and Jobs Act so families can also use their education savings to pay for apprenticeship fees to learn a trade, cover the cost of home schooling, and help pay off student debt.” Each of the three are significant in their potential long-term impact to the 529 industry landscape, and this information helps to narrow the focus on where enhancements to 529 savings plans may occur.