Savings Plans

Section 529 college savings plans are tax-exempt college savings vehicles with a low impact on need-based financial aid eligibility. Unlike prepaid tuition plans, there is no lock on tuition rates and no guarantee. Investments are subject to market conditions, and the savings may not be sufficient to cover all college costs. However, with this added risk comes to opportunity for potentially earning greater returns.

Most 529 college savings plans offer an adaptive asset allocation strategy based on the age of the child or the number of years until enrollment. These plans start off aggressively when the child is younger, and gradually switch to more conservative investments as college approaches. Typically they will use four or five age ranges, such as newborn-6, 7-9, 10-12, 13-15, and 16-18+.

Most 529 college savings plans also offer a variety of risk-based asset allocation portfolios, ranging from aggressive 100% equity funds to more conservative balanced funds and money market funds. Some 529 college savings plans offer a fund that protects the principal against inflation and guarantees a minimum fixed rate of return (typically 3%).

The money in the plan is controlled by the account owner, not the child. So if the child decides to not go to college, they do not have access to the funds as they would with an UGMA account.

Section 529 college savings plans are similar in many ways to retirement plans, such as 401(k) and IRAs, although with much higher contribution limits and more favorable tax status.

Topics

  1. Advantages of a college savings plans

  2. Disadvantages of a college savings plans

  3. Where can I find eligible schools?

  4. More information?

1. Advantages of a college savings plans

The advantages of section 529 college savings plans are as follows:
Low impact on financial aid eligibility, because section 529 college savings plans are considered assets of the account owner and not the beneficiary.
Very high cumulative contribution limits, typically around $235,000 per beneficiary and as high as $305,000 per beneficiary.
No restrictions on choice of college, other than that it must be an accredited post-secondary institution.
Flexible investment options, such as age-based asset allocation strategies and risk-based asset allocation strategies. Many offer a choice of professionally managed funds and index funds.
Can enroll at any time.
No date by which funds must be used.

2. Disadvantages of a college savings plans

The disadvantages of section 529 college savings plans are as follows
State tax benefits may be limited to the state's own section 529 college savings plan.
You are limited to the investment options provided by the plan.
Although the more aggressive investment options offer a greater potential return, they also offer a greater potential risk. Except for principal protection portfolios like money market accounts and guaranteed investments (offered by a few states), the principal you invest is at risk. If the program's manager makes bad investment decisions or the stock market declines, you could lose money.
Expenses and sales charges may be higher than what you'd pay if you invested the money yourself. Some plans charge excessively high sales loads of as much as 5% or 6% and management fees of as much as 2% a year

3. Where can I find eligible schools?

A database of all eligible schools can be found on the US Department of Education web site. You can also call the US Department of Education at 1-800-872-5987.
For tuition rates at US colleges and universities, visit the IPEDS COOL tuition finder.

4. More information?

For more information about section 529 plans and other education tax benefits, please see IRS Publication 970, Tax Benefits for Higher Education.