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Best 529 Plans

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The amount of collective student loan debt in America has surpassed $1 Trillion but to bring it closer to home, Finaid says that the rate of college tuition inflation is normally twice that of the regular inflation rate. That means that the cost of college will rise an average of 6% every year. Add to that the fact that wages for most Americans are stagnant, college is quickly becoming much like a home. American families cannot afford it without going in to debt.

How do you plan to pay for your child’s college education? Maybe a large portion of their tuition is covered by academic or athletic scholarships but for the average family, that isn’t the case. Needs based grants will only pay for a portion of the tuition making student loans a reality for many. A recent study by the Associated Press found that one out of every two college graduates either can’t find a job or they’re underemployed working in a field unrelated to their college major. This makes graduating with as little debt as possible a priority.

The 529 plan is the best answer to this problem. Although many plans used to allow for the purchase of years of college at today’s prices, most plans now work like a 401(k) where you invest money in to the plan and choose the mutual funds that fit your objectives. If you start contributing early, the tax advantages allow you to build up enough money to keep applying for student loans and many allow family and friends to contribute to the fund too.

The Best 529 Plans

529 plans are state sponsored but you don’t have to live in that state to enroll in their program. Some states offer tax advantages to residents who enroll in their state’s program. If that’s true of your state, take in to account your tax advantages when evaluating fees and investment return. The general rule is that states with no state tax will not offer a tax break and most states that do, provide deductions or credits for contributions.

To find the best 529 plans, start by going to savingforcollege.com and researching the plan in your state. Evaluate a 529 plan just as you would a 401(k). Keep the fees as low as possible and stick with low cost index funds unless there’s a reason to pay the extra fees for an actively managed fund.

Next, many of the major financial media outlets publish yearly articles where they compile a list of the best 529 plans. States like Nevada, Alaska, Utah, Ohio, and Virginia make the list each year because of low fees and great return. CBS, as well as Kiplinger and MSN publish lists to get you started.

Bottom Line

If you have a young child, you’re in the best position to start a college savings account now and some of the best 529 plans are the best tools for assuring that your child doesn’t have to graduate with debt.

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14 Responses to “Best 529 Plans”

  1. Sarah in Alaska says:

    A few years ago some states actually kicked in a little money if you got started early (i.e. before the child entered Kindergarten). I have a feeling those programs have disappeared – but check for those benefits too.

  2. NateUVM says:

    Another potential benefit to most (if not all) plans are that you can change the beneficiary (the person whose expenses would be covered)at any time. What this means is that you can start an account for someone before they are even born! Just name yourself as the beneficiary until the child is born and receives their own SSN. This allows for more earnings to accrue in the meantime.

    While you some may chose to wait until they are actually pregnant before starting an account for their child, if you already have children, why not start sooner? Worst case, if you don’t end up having that next child, switch the beneficiary designation to one of your other kids. More savings for them!

  3. Scott says:

    Also, check into the reallocation rules for each 529 plan. Many or most plans don’t allow you to reallocate funds but once per year (so don’t treat this as your active trading slush fund). If buy and hold is not for you, then a 529 plan probably isn’t either.

  4. Robin says:

    I’m not a big fan of 529 plans as you can lose money in them when the market is down. Many of my friends contributed to 529 plans for their kids and then when it was time for their kids to go to college, they had less money in them than what they actually contributed. I contributed to fixed indexed annuities for each of my kids while they were young. (You participate in the market gains but when the market drops you do not lose money) I had them take out loans in their names when they went to college with the understanding that they had to pay the loans back after they graduated. This way they had a “vested” interest in their own education and they could start establishing credit. At graduation we gave them their annuity policy as their graduation present. They cried, knowing that their education was paid for. Every year they take out 10% (penalty-free but have to pay income tax) and put it into a separate checking account from which their loans are paid automatically (with a reduced interest rate as it’s on automatic debit). My financial planner set this up for us and now that I help families with retirement planning, I do the same for my clients. I also like indexed universal life insurance for this purpose too as the money does not need to go for college (maybe a down payment on a house?) and it does not count as an asset when you do your FAFSA as a 529 does!

    • NateUVM says:

      Fixed-index annuities depend on built-in “participation rates.” They are contractual rates at which the contract holder participates in the given index’s upside, however that is calculated (usually, growth based on anniversary values). For instance, if your participation rate is 75%, and the index goes up 200% over the course of your holding the contract, then you receive a 150% return on your money (75% * 200%).

      Based on what you’ve said here (bought the annuities “while they were young”,given as a “graduation present”), I’m going to guess that you opened these fixed-index annuities 10+ years ago. Back then, participation rates were 80-90-110%, give or take, depending on the particular product.

      Now…? 20-30-40%…? Maybe…? And the market is MUCH more volatile now, so the underlying indexes (usually the S&P 500) don’t drive fixed-index returns the way they used to 10-15 years. People aren’t making NEARLY as much as they used to on fixed-index annuities, if they make anything at all. Add on top of that the debate about how they should be regulated… Should they be registered products or not, etc… Reputable insurers are backing out of the market as they are becoming less worth the hassle.

      Back to the product, you may still have down-side protection, but up-side is iffy, at best. Loads of inflation risk with these products.

      I’m sure that this type of product worked well for you and your children based on when you must have purchased them, but I think you got a little lucky with the performance based on that timing.

      Final note…(and Robin, I am sure this doesn’t apply to you) but the commissions on these products are notoriously high (~10-12%). So high that one has to question how much influence it has in advisors’ decision to suggest them, whether on a subconscious level or no.

      • Neal says:

        I think this is the best comment I’ve read on this site. Verryyy informative. I liked the annuity comment and thought to myself hmmmm…. maybe its time to reevaluate annuities. Then Nate’s comment quickly brought back why annuities aren’t the best deal. HIGH load fees, capped earnings due to what I feel is unreasonable management fees. I’m sure there is more. I’m thinking my Vanguard 529 with an aggressive growth mix for a 5 year old isn’t looking too bad.

        • NateUVM says:

          Thank you for the compliment, Neal. Hopefully, though, I haven’t painted with too broad of a brush.

          Overall, It is my belief that there is always a cohort that a particular financial product is going to be good for, and I believe that annuities are a good product for a certain group of people in certain situations. (e.g. A lot of the high fees we’ve referred to have to do with early withdrawals from the product early. If you are holding until retirement, they may/would not apply.)

          The situation being described by Robin, above, is one where the product is not being used according to its original intent or intended application, so one needs to be REALLY careful with the fee structure, potential for gains, etc…and how it might impact your overall investment.

    • Seth says:

      I love the idea of having them take out the loans to build additional investment on the childrens’ part, but I was curious why you encouraged them to make the payments on the loans after graduation versus just paying them off.

      Also, do you think the “hiding” of their college funds influenced their decisions on the school to attend? I know I would have gone to a cheaper school if I would have thought I had to take out loans to pay for it completely on my own.

      • NateUVM says:

        Seth, there are two pitfalls to making withdrawals from fixed index annuities. First, if you withdraw more than a stated “free” amount, there are surrender charges that can SEVERELY impact the value of the account. Second, these are retirement accounts that receive favorable tax treatment….IF you hold them until retirement.

        There is a way around these pitfalls. Making periodic, regular withdrawals. The IRS lets you to do this, pre-retirement, as long as you keep up the withdrawals until you either exhaust the funds or you retire (roughly). And, as long as the payments don’t exceed the free amount, you are okay on the account maintenance side of things, too.

        Thus the reason, I assume, for not just paying off the loans with the proceeds from the annuities all at once, but, rather, in a piecemeal fashion.

        I like the idea, I just don’t know if these particular products still produce, in this economy, the return needed to make it work.

    • NoCleverName says:

      Many of my friends contributed to 529 plans for their kids and then when it was time for their kids to go to college, they had less money in them than what they actually contributed. I contributed to fixed indexed annuities for each of my kids while they were young.

      FYI – Most, if not all, 529 plans offer low-risk investment options. The downside is that you will lose potential gain over the long haul with the mutual fund options they offer. As for annuities, they have substantial fees that eat away at your gains. So, I do not believe it is a clear cut advantage as you present it to be. However, it is an option and I’m sure it worked well for you and may work well for others. Personally, I run away from financial products that charge me 8% or more, up front, for their products.

  5. Can you use 529 plans to pay off student loans?

  6. Dave says:

    I can’t say I am a fan of 529 plans. Your investment is ask risk everyday. With my luck it will be down 40% when I finally need it. I sleep better at night knowing my prepaid college plan is ready to go. It’s guaranteed and almost risk free if the state doesn’t go belly up.

    For a grand total investment of $15,000 I have 4 years of state college paid for.

    Sure it’s possible I could of ended up with more with a 529 but it’s also possible i could lose half of it. I’ll play it safe and take half a loaf.

    • Neal says:

      Prepaid state programs are available in about 7 states in the union – most have been discontinued. Then there is the private college prepaid program – which could be a good deal and worth it if you are going to a top tier school. Why pay a private school premium for a psychology bachelors at a bottom tier all girls school in Virginia – I don’t get it.


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