Are 529 Plans the Best Way to Save for College?

Estimated total costs at private colleges are nearly $63,000 in the 2014-15 school year, with more than $40,000 going for tuition, according to Two years from now, the total is projected to top $70,000. “Increases in college costs, especially for tuition, have been outpacing overall inflation,” says James Sanford, founder of Sag Harbor Advisors in New York.

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Comments (8)
That's just one advisors if the fees are lower than 1.75%, then how does that advisors opinion change?? We offer the American Funds 529 plan. The fees are some of the lowest I have ever seen. Of course that's just my opinion....
Posted by Robin O | Monday, August 18 2014 at 4:22PM ET
Why have the entire investment universe open to you when you can select from one family of closet-index funds, which are cheap compared to other active managers, but expensive when considering their active share/information ratio. The point isn't so much the funds, but the account vehicle. Will the beneficiary of a 529 plan even attend school? Will they be smart/hard-working/athletic/musical and get a ton of scholarships? Will they attend trade school for 2 yrs, in-state, and keep their total bill to a minimum? Will technology revolutionize brick-and-mortar colleges by the time my 5 kids all under age 8 reach college age? Will MOOC's make brick-and-mortar schools almost obsolete? 529 plans lock you into something that may be very wrong for that child's situation, and the only benefit is a small state income tax deduction and tax-free withdrawals. Tax-free withdrawals can also be taken from a Roth IRA, as well as a non-qualified investment account for those in lower tax brackets.
Posted by Thomas D | Monday, August 18 2014 at 5:57PM ET
In my opinion, 529's or stock is not the way to save for college. In my 14 years as a college funding adviser, I have seen many 529's be depleted by 35
5% in 2001-2002 and again in 2007-2008 because these vehicles have the money invested in the market! So that begs the question: What good is putting money in a vehicle that can grow tax free and come out tax free if you can lose your principal?!! The other myth is that you can take the money out for college expenses. You can only take the money out to pay AQEE - adjusted qualified educational expenses. If you use the money for other than the AQEE there is a 10% federal penalty as if you took money from an IRA before age 59 1/2. There are much smarter and safer ways to pay for college.
Posted by Dennis S | Monday, August 18 2014 at 10:13PM ET
Here is a great Idea! Why not go to a state school (and use a combination of work, scholarships, and the US Army (ROTC) pay for it? We had 3 in college at the same time and had no choice.

Could this also be a ploy by Fee-only Advisors to get your fees? Add in a 1% advisory fee (fee only advisors often will not do even that with small accounts of less than $100k). And who will start with only $250 like American Funds? And what happens when that custodial Beneficiary turns 18 (or 21 in some states) and decides to join the Marines or buy a Corvette (used of course). This actually happened to one of my UTMA clients.

Lee Pence CFP(R) Lieutenant Colonel US Army (Retired).
Posted by JOHN L P | Tuesday, August 19 2014 at 9:20AM ET
For high earners, a 25% tax rate is too low (federal capital gains alone will be 23.8%). Also, the differential in fees will not be 1.75% as any alternative investment will also have some fees.
Posted by Steve C | Tuesday, August 19 2014 at 1:00PM ET
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