Rating the Best College Savings Plans

My weekend financial project is to shore up the kids’ 529 plans. With my oldest child a mere eight years from starting college, and us dreadfully behind in accumulating savings, I have decided it is time to move college savings up the list of priorities a bit. Time to hunt down the best 529 plans available.

The first step will be to conduct a more thorough review of our current investment elections, including the 529 plan itself, and the investment elections within the plan. Like most people, we went with our in-state option since it was a decent plan according to most rankings, and we could benefit from a state tax deduction on contributions. However, after reviewing performance of the limited fund options I’m not so sure it is the best place to park the kids’ college savings funds, tax deduction or not.

Which States Have the Best 529 Plans?

Utah

According to a recent Morningstar article, The Best and Worst 529 College-Savings Plans, it would appear both Utah and Virginia offer solid plans. Morningstar’s write up about the Utah plan sounded the most appealing to me:

For those who want a tax-sheltered way to save for college using Vanguard index funds, this is the plan. Utah’s 529 plan has long been a favorite of ours and remains a strong choice for its low costs, flexibility, and tried-and-true Vanguard index funds. The plan’s fees are a rock-bottom 0.22% to 0.35%, making it one of the cheapest plans in the country.

Hard to go wrong with “rock-bottom” fees and Vanguard Index funds! In fact, I think Vanguard is the best place to open a Roth IRA, too.

Virginia

Virginia offers two 529 options: a direct-sold plan managed by the state gives the flexibility to invest in a variety of different mutual fund companies, and an advisor-sold CollegeAmerica plan which offers a nice mix of American Funds with relatively low fees. From Morningstar’s review:

The state’s other topnotch choice, the advisor-sold CollegeAmerica plan, remains a favorite for its large selection of mostly first-rate American Fund mutual funds that give investors access to a broad array of asset classes, including emerging markets, small-cap foreign stocks, and foreign fixed-income securities. Fees are attractive, too, as most of the plan’s A-share options are below 1.00% in total annual fees.

It is still a good idea to check out your in-state 529 plan, because the ability to deduct your contributions, up to a certain amount, is very appealing. But don’t fall into the trap of investing in a bad plan for a tax deduction. Over the long term, you will come out further ahead by investing in a healthy plan out of state, if necessary.

A Word About Age-Based Allocations

Nearly all 529 college savings plans now offer various levels of age-based allocation, from the most aggressive to to very conservative. One problem with these types of plans, and any targeted-allocation fund for that matter, is that the person managing the fund may have a much different risk tolerance than you do. This could lead to funds being invested too heavily in higher-risk investments too close to college age. A sudden downturn, like the one we saw in the fall of 2008, could quickly pull the rug out from under college plans by decimating a 529 plan balance.

Parents, Secure Your Own Retirement First

I love my kids more than anything, but I also recognize that if I don’t manage to sock away $50,000 in a college fund for them, life goes on. They can work their way through school, like I did, and they can apply for financial aid, grants, scholarships, etc.

I’m not particularly fond of student loans, although some small amount of borrowing could make sense to supplement other funding options. And before all you student loan fans email me, let me just say that I’ve heard from too many 24 year-olds drowning in $75,000 of student loan debt to be persuaded to like them.

For Canadians, a plan similar to a 529 is an RESP (Registered Education Savings Plan). In basic terms, this is an account you can start for your child and make contributions to over the years; it’s a great way to save for post-secondary education in Canada. Be sure to look into this as an option.

As parents, our top priority should be taking care of our own financial futures so that we are not a burden on our children. Once we have paid down debts, built a solid emergency fund, and are contributing to our own retirement plans, then we can turn our attention to college savings. Remember, there are no scholarships for retirement.

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Comments

  1. I am so glad you made a point here about it being okay NOT to have money for children’s college. Parents have to survive themselves first and make sure they are okay in retirement. My own opinion is this: For most people, they cannot afford to pay for their child’s college education. They shouldn’t have to. A child can go to community college, then move on to a state college. Total debt would be around 20,000 or so. (Unless they are working hard during the school year or summers and paying this down as they go along.) The child should only go to college if they plan to use a specific, focused degree in order to make a good living later. In this way, the debt is not a burden.

    On the other hand, if a child wants to attend an excellent, ivy league school or something of that caliber, they should work very hard to earn a scholarship. Or, work for years and finish school many years later. I have a relative who spent more than 10 years in night school while working full time before she got her masters. It can be done. I also have a daughter who has attended community college for a couple of years for free, to earn the basics in credits. she then goes on to a state college for the last 2 years for her bachelors. She will have a very small debt.

    One thing that can be done, if your child wants to get a degree from a specific college,in most cases they can enroll in the last semester or last year and the degree will have THAT schools name on it. This is a very inexpensive way of obtaining an education while getting a degree from a “good school.” (By attending community college first)

    I really don’t think paying for school is a burden the parents need. Unless, of course, they are wealthy and have plenty of money.

  2. Have you considered ESAs instead? Education Savings Accounts, called Education IRA. For a variety of reasons, this is Dave Ramsey’s first choice over any of the 529 plans. He has a chapter devoted to College Funding in his Total Money Makeover book. He makes some good points. I would go with an ESA instead. He says that the best 529 plans available are the flexible plans, not the 529 life phase plan or a 529 fixed portfolio plan, but still 529′s are his second choice — the first being an ESA plan.

  3. If you do opt for a 529 – be sure to watch out for excessive fees. Advisor based fees tend to be absurdly expensive. Direct-sold funds tend to be the least expensive. Also, funds run by Vanguard and TIAA-CREF generally have low fees.

  4. I have two separate 529 plans in Virgina. Both of them are the VEST 529. They have a few options, but pretty much all of them are age based and adjust automatically as the kids age. Really easy to setup the ACH transfers too. Also, management fees are very low. When I joined there was an application fee, but I believe this is waived now.

    • The VEST plan actually has more choices than most 529 plans. You can invest in age-based strategies, strategy based plans, or you can choose individual funds. They have a wide range, from cash/bonds, large cap, growth, international and even a REIT fund. All the funds use Vanguard. The overall costs of this plan is one of the lowest in the industry. There are no brokers fees, no set up fee (use the coupon code), no annual fees. There are only the underlying fund fees and these are the lowest in the industry among index funds. This is one of the best plans in the US.

  5. You should consider the Monetta Young Investor Fund. Great performance,low fees,low minimum and a financial literacy program that will get the kids involved in the savings process. If you want tax advantage of a 529, open a Coverdell account. This is the ideal college saving option ,not a 529 plan.Website: younginvestorfund.com

  6. I compared NY, Utah and Virgina’s 529 plans and the one thing that concerns me is the following:

    Does the sponsoring state exclude the value of an account for state financial aid purposes?

    NY: yes
    Utah and Virgina: No

    The aspect that is attracting me to 529s was that my child’s chances of getting financial aid was better. Am I reading this correctly? If investing in Virgina or Utah’s 529 will count against my child’s chances of receiving financial aid?

    Can anyone explain this?

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