How College Savings Plans are Changing

Written by: Cash101 Staff

How College Savings Plans are Changing

States are offering promotions and new features to make 529 savings plans, state-administered college savings plans, more attractive to investors. These plans are also known as Qualified Tuition Programs, or QTPs. In recent years, the steep rise in tuition and reports that some plans were underfunded slowed contributions. Some plans are now closed to new contributors as states struggle to meet the needs of their existing clients.

Many of the open 529 savings plans now pulling in contributors build more risks into the savings accounts to offset inflation and market volatility. The promotions for 529 plans include matching funds: dollar-for-dollar matches from private donors; savings accounts for near-term payments; allowing contributors to select mutual funds managed by firms other than the main, state-selected manager; and offering FDIC-backed bank products and CDs with high interest rates.

State-run plans vary greatly in terms of ratings and rules. Contributors should compare the advantages of plans with a professional financial advisor. Increasingly, states are finding that providing good advice helps them retain contributors and increase the amounts of contributions. For example, IRS rules for 529 savings plans allow plan holders to change investments only once a year. The exception is if the contributor changes their beneficiary. If a parent is contributing to plans for two or more children, they can change beneficiaries and asset allocation frequently.

States are also drawing attention by offering low-risk and high-risk plans. The former are typically tied to market performance and the latter to inflation and increases in tuition. Contributors should determine whether they need new features after considering the rules of their 529 plan, the goals of the beneficiary, and the age of the beneficiary. Many plans are engineered to become more conservative as the beneficiary ages. In order to maximize their return, contributors should ask what advantages they want from their investment. When a contributor allocates money to a plan outside their home state, they may miss out on state tax breaks, discounted fees, and other incentives.

There are a number of dangers in investing in 529 savings plans. Low-cost index funds advertised by advisors may only be available to residents who live in the state offering the plan. Money-market and index funds can give low or negative returns. If a contributor selects an outside fund to manage these funds, the fees for the funds can be higher. A plan manager can purchase too few safe instruments such as bonds and keep too little cash in the account. Contributors can avoid problems by closely monitoring how the plan performs year to year.

Another tip for contributors is that adults can benefit from 529 savings plans. Adults who are returning to college or interested in pursuing a professional or technical degree can set up a 529 savings plan for themselves. Relatives and family friends can be contributors. There is another type of plan known as a 529 plan, the prepaid tuition plan. The changes and tools in 529 savings plans are typically not offered in prepaid tuition plans.


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How College Savings Plans are Changing

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