you needed a new car, you probably wouldn’t pick the
first one you saw, you’d drive others and compare
prices. You’d want to get the most for your money.
even though a four-year college education — at about
$100,000 — now costs roughly three times more than the
average car, parents generally do little comparison
shopping for the best way to amass the money they will
need for college. Many don’t make the most of their
savings, arriving at college years unprepared.
on a savings account, for example, typically falls far
short. Savings accounts, while safe, barely grow. If
parents saved $2,600 at the start of each year in a
savings account, they’d have roughly $13,200 for
college after five years.
a 529 college savings plan can put a family closer to
where it needs to be.
"moderate allocation" investment in a 529
amasses about $16,800 on average with the same
$2,600-a-year in savings.
"moderate allocation" investment gets its name
by taking judicious risks with a combination of stocks
and bonds, often putting close to 70 percent of a person’s
savings in mutual funds that invest in stocks. During
the last five years, the "moderate"
risk-taking has gained about 8.7 percent a year,
according to Morningstar. But there aren’t guarantees
with mutual funds, and there have been years like 2008,
when investors lost more than 20 percent on
given the opportunity to recover from a loss when
children are young, advisers often pick a moderate
allocation for children about 9 to 12 years old and
become more conservative as children approach college.
not the investment choices alone that generally make 529
plans a more effective way to save for college than
using savings accounts.
tax laws, when a family saves for college in a 529, they
get to use all the money they’ve accumulated for
college without sharing it with Uncle Sam.
accounts don’t provide that tax advantage. Nor do
mutual funds that are selected outside of 529 or
Coverdell College Savings Accounts.
matter. Morningstar has calculated that if a person in
the 25 to 35 percent tax bracket put $2,600 a year for
five years into the average mutual fund that selects
large fast-growing company stocks, they would have about
$17,800 to pay for college. But in a 529, because of
protection from taxes, they end up with $18,440 in the
same type of mutual fund.
an extra benefit, almost half of states give people
extra benefits, often additional income tax breaks, if
they save money in their home state’s 529 plan,
according to Morningstar. Some also provide grants or
10 percent of states will give 529 savers a tax benefit
even if they pick a 529 plan offered by another state.
See what your state offers here.
don’t have to pick your state’s 529, although
Morningstar notes that valuable home-state benefits can
make it worthwhile to use a good versus an exceptional
529 plan. Morningstar gives "bronze" ratings
to good plans. Compare quality and benefits at
Morningstar’s site or here.
key to maximizing your savings is to pick a 529 plan
from a state that is conscientious about offering you
quality investment choices appropriate for the age of
your children, plus solid fund managers and low fees.
Quality varies from state to state.
four best, according to Morningstar, are the Maryland
College Investment Plan, T. Rowe Price College Savings
Plan in Alaska, the Vanguard 529 College Savings Plan,
and the Utah Educational Savings plan. The funds are
managed by T. Rowe Price and Vanguard, which Morningstar
lauds for strong management at very low prices. It also
praises the American Funds, which operate Virginia’s
College America and the low cost index funds of the
Michigan Education Savings Program.
have been improving and cutting fees over the last year.
Consequently most are worth the state benefits,
according to Morningstar. The only plans Morningstar
pans with a negative rating are the CollegeAccess 529 of
South Dakota, the Ivy Funds InvestEd 529 of Arizona, and
the Schwab 529 College Savings Plan of Kansas.