The FRED Blog has discussed the income and wealth boosts from graduating college (a.k.a. the college premium). This premium does seem to justify the expense of a college education, and today we discuss how to pay for it by using a 529 saving plan.

529 plans are named after the section of the federal tax code that rules their treatment. The FRED graph above shows data from the Board of Governors of the Federal Reserve System reporting the dollar value of savings held in two types of 529 plans:

• College saving plans (the blue area): These are purchased shares in mutual funds administered by states.
• Prepaid tuition plans (the red area): These are purchased tuition credits at designated educational institutions.

Households contribute to those two saving plans with disposable income (i.e., income after paying taxes). But, since 2001, tapping the college savings portion of the 529 plans to pay for educational expenses is tax-exempt. In other words, contributions are not tax-deductible but qualified withdrawals are tax-free. This feature has boosted the growth of college saving plans, which (at the time of this writing) amount to 94 cents of every dollar held in a 529 plan. Incentives matter!

To learn more about this topic and its coverage in the US Financial Accounts and Enhanced Financial Accounts, read this FEDS note.

How this graph wase created: Search the alphabetical list of FRED releases for “Z.1 Financial Accounts of the United States” and select “Table B.101. Balance Sheet of Households and Nonprofit Organizations.” Under the heading “Assets held in 529 college plans,” select the data series “College saving plans” and “Prepaid tuition plans.” Next, use the “Format” tab to change the graph type to “Area” and the stacking option to “Percent.”

Suggested by Diego Mendez-Carbajo.