Franklin Templeton Report Tackles 529 Plan Myths

A new Franklin Templeton analysis estimates that the average student loan debt load in the U.S. is now more than $30,000 at graduation for those earning a four-year college degree.

The research was put together by Roger Michaud, senior vice president and director of college savings for the Franklin Templeton 529 College Savings Plan, and Mike O’Brien, director of program marketing in the firm’s Global Client Marketing group. The pair presents a compelling look at how mounting student debt can have a long-term impact on workers’ financial futures.

According to Michaud and O’Brien, the amount of student loan debt today exceeds that of automobile or credit card debt.

“We are even starting to see a new generation of parents who are still paying off their own student debt while raising children of their own,” they note. “These parents are stuck in a student loan debt sandwich. Not only do they have their own student debt, but they have to finance their children’s education, sometimes with more debt.”

The analysis looks at Federal Reserve data gathered to answer the question of whether student loan debt might be acting as a restraint on broader U.S. economic growth.

“While increases in debt payments since 2001 appear to have had only a small direct effect on consumption overall so far, increased student loan debt may have other impacts, including the loss of access to other types of loans, for a car or house, for example,” the pair explains. “So, many young adults may be delaying purchases or even putting off getting married or buying a house of their own due to financial constraints. Some individuals even wind up tapping their 401(k) plans to pay off student loan debt.”

Importantly, the analysis takes time to highlight the fact that student loan debt can also be a good thing.

“One might be getting the impression that we think all debt is bad. That is certainly not the case—debt can be a powerful tool,” they suggest. “According to the National Center for Education Statistics, the median earnings of adults aged 25 to 34 with a bachelor’s degree were 64% higher than those with only a high school diploma. And those with a master’s degree earned 20% more than those with a bachelor’s degree.”

There is also the simple fact that paying back debt successfully helps boost one’s creditworthiness in general. According to the Franklin Templeton analysis, the pattern of higher earnings associated with higher levels of educational attainment hold true for both males and females, as well as across ethnic groups.

“The thing we would like to emphasize is that if you are going to take on student debt, borrow wisely, and be smart about your choices—pick the right school, don’t borrow more than you need to, and make sure you graduate!” they conclude. “The worst case is to have the debt but not the degree.”

529 plans can help a lot

The report urges parents to get started as early as they can to develop a plan to pay for their children’s education.

“And it doesn’t matter if your child is a newborn, 12 years old or even a teenager,” they note. “It’s never too late to put a plan in place. In our view, it’s important not only to make an initial contribution toward college savings, but to do it systematically so it has a chance to grow. Don’t be afraid to ask friends and family to contribute along the way. If asked, most family members are more than happy to contribute toward college costs for their nephew, niece or grandchild. In lieu of a holiday or birthday gift, we think a contribution to a college savings plan could be much more valuable down the road.”

The researchers go on to highlight the main perks of 529 plans: “Money invested in these plans grows free of federal income tax when withdrawn for qualified higher education expenses such as tuition, books, and[—when the student attends at least half time—]room and board. Depending on where you live, you may be able to take advantage of state tax benefits, too.”

It is also important to understand some of the risks in putting money into a 529 plan, the report says. “Tax benefits of 529 plans are conditioned on meeting certain requirements. Federal income tax, a 10% federal tax penalty, and state income tax and penalties may apply to nonqualified withdrawals of earnings.”

Readers are encouraged to download and read the full Franklin Templeton 529 Plan Handbook for additional information.