Saving for College the Smart way - 529 Plans

The Wall Street Journal just published an article about college planning and 529 plans in this turbulent stock market. Among the points it makes: if you feel the need to get your money out of your 529 plan and your kid is in college, ask the college if you can pre-pay for tuition and fees. If you pull the money out of the 529 plan now and pay for college later, you will have to pay the 10% fee for withdrawing and not using the money to pay for qualified college expenses.

Here’s a link to the article.

Scared about the market downturn? We all are, but that doesn’t mean you should stop contributing to 529 college savings plans.

Wisconsin just released a number of new options for its Edvest 529 plan, including a number of less-risky options. According to a release from the state and Wells Fargo:

“The financial market’s recent volatility shouldn’t discourage families from investing in their child’s college savings plan,” said Wisconsin State Treasurer Dawn Marie Sass. “These new EdVest choices offer Wisconsin families three new conservative options, including portfolios that primarily invest in certificates of deposit that are federally insured by either the FDIC or NCUA. Combined with our existing money market portfolio and bond portfolios, EdVest offers a variety of options to meet the needs of conservative investors.”

My daughter just turned 2, and I started investing in her 529 plan when she was about 3 months old. Needless to say, the account isn’t worth as much as I’ve put into it.

No one is happy about the global stock market crash. But that doesn’t mean you should stop contributing to 529 plans. Think about it this way. You may have “bought” the stock market at 14,000, and 13,000 and 12,000 and 11,000. Now that it’s cheaper, should you stop buying it? One of the nice things about 529 plans is they let you set up a regularly monthly contribution. If you stick to your plan, that means you buy into the market every month. This allows you to dollar cost average your investments.

Although my time horizon is long, you need to evaluate your strategy if your kid is going to college soon. Many 529 plans offer time horizon funds which automatically switch some of your money into bonds and less risky investments when your kid gets closer to college. That way a sudden crash in the market, like what we’ve seen lately, won’t keep you from being able to pay for college.

Unless you think the market will continue on a downward trajectory from now until when your kid goes to college, it probably makes sense to stick to your plan and keep investing on a regular basis.

Utah’s 529 plan, already one of the lowest cost options in the country, has dropped fees once again. It has also added a new investment option that focuses on international equities. The full press release is below:

(Salt Lake City) UESP continues to focus on the child by dropping fees and expanding investment options in conjunction with “National College Savings Month.” More money in their account now means more money for higher education later.

“It just got cheaper to save for college. Low costs and well-run underlying funds are important to investors when deciding how to save for a child’s higher education,” said Lynne Ward, Director of UESP. “The fee reduction and new investment option assist account owners, beneficiaries and UESP move closer to the shared goal of children receiving a higher education.”

“UESP makes it easy and affordable for Utah families to save for college. The Utah state tax credit and reduced fees provide an even greater incentive to start planning for your children’s future,” said Bill Sederburg, Commissioner of Higher Education.

Fee Reduction

Underscoring its already low-cost reputation, UESP is reducing fees again, providing individuals an opportunity to put more money toward future college expenses. The Administrative Asset Fee will be reduced 12%, and the Administrative Maintenance Fee is being lowered 25% on all investment options effective October 1, 2008.

The total range of Asset Fees on any UESP investment option will be 0.22% to 0.34%, which includes the Vanguard underlying expense ratios. The fee is assessed quarterly, on the last day of each quarter.

The Administrative Maintenance Fee will fall from $20 down to $15 annually. That is only $3.75 per quarter for accounts with $5,000 or more. Accounts with less than $5,000 are charged only 0.075% of the balance each quarter. The fee is assessed on the last day of each quarter.

Utah residents who invest in Option 1—Utah Public Treasurer’s Investment Fund are assessed no fees when saving for a child’s higher education. Additionally, the Administrative Maintenance Fee is waived for all Utah residents, regardless of investment option.

New Investment Option

A new static investment option with more exposure to international equity funds will be available to account owners October 1, 2008. This option results in the highest allocation in international securities of any current UESP product:

* 70% in the Vanguard Institutional Total Stock Market Index Fund (VITSX)
* 30% in the Vanguard Institutional Developed Markets Index Fund (VIDMX)

This new investment option (Option 10 Equities—30% International) will provide investors with greater access to the world market and growing regional economies.

The Vanguard Institutional Total Stock Market Index Fund seeks to track the performance of the MSCI U.S. Broad Market Index. The fund typically holds 1,200 to 1,300 stocks in its target index (95% of the U.S. Broad Market Index) and a representative sample of the remaining stocks.

The Vanguard Institutional Developed Markets Index Fund seeks to track the performance of the MSCI Europe, Australasia, Far East Index by investing all, or substantially all, of its assets between the Vanguard European Stock Index Fund and the Vanguard Pacific Stock Index Fund, based on the market capitalizations of European and Pacific stocks in the Index.

Visit www.vanguard.com to learn more about these underlying funds.

To learn more about the Utah Educational Savings Plan, call 800.418.2551 or visit www.uesp.org.

Texas has opened a new pre-paid college savings plan to replace the shuttered Texas Guaranteed Tuition Plan. The new plan is called Texas Tuition Promise Fund. Details are forthcoming, and you can read more on our Texas 529 plan page.