The Smart Solution for College Savings

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Among all the choices that parents have when they're saving up for their children's college education, 529 plans can be one of the best. But you have to pick the right plan, because the wrong choice can cost you more than its benefits are worth.

Why 529 plans are a great deal
In general, most people saving for college should strongly consider 529 plans. Like retirement accounts, 529 plans offer tax-deferred growth, as income you earn on the money inside the plan doesn't get taxed while it's inside the 529 account. Moreover, if you eventually use the money toward qualified college expenses, the income the 529 plan generates becomes tax-free. Even better, the money inside a 529 account is treated as the parents' assets rather than the child's assets for financial aid purposes, which gives you a better chance of tapping other types of financial aid for your child.

You have lots of choices among 529 plans. Each state offers at least one plan, and many plans are open to out-of-state residents, meaning that you have dozens of different plans at your disposal. Each plan has a unique mix of investments for you to choose from, and costs can vary widely from plan to plan.

In a tough investing environment, great returns have been hard to come by in recent years. That makes keeping fees as low as possible that much more important to your college saving success. With that in mind, let's take a look at how different states' 529 plans compare in terms of cost.

The low-cost providers
To get a sense of the range of costs out there, I turned to's study of 529 fees. The study compares expected 10-year total costs of each state's plan. Here are the lowest-cost providers:



Expenses for Low-Cost Option

Expenses for High-Cost Option


START Saving Program




CollegeAdvantage 529 Savings Plan




Education Savings Trust




Educational Savings Plan




Fidelity College Savings Plan



Source: Costs are projected over 10 years.

Each of these 529 plans shares something in common: They all offer low-cost index-type funds from either Vanguard or Fidelity. For stock investments, Louisiana and Utah offer exclusively mutual funds from Vanguard, as well as investments through their respective state treasurers. You can also often get fixed-income choices as well. Ohio, for instance, offers CDs through Fifth Third Bank (Nasdaq: FITB  ) .

Note, though, that even these low-cost plans also have some higher-cost investment options, so you have to be careful which ones you pick. In addition to Vanguard, for instance, Virginia's plan offers investments managed by Franklin Resources's (NYSE: BEN  ) Franklin Templeton, Invesco (NYSE: IVZ  ) , and Legg Mason's (NYSE: LM  ) Western Asset Management.

The other side of the spectrum
On the other hand, some plans only offer investment options that come with a high price tag. Here are the highest-cost plans:



Expenses for High-Cost Option

Expenses for Low-Cost Option


Pacific Life Funds 529 College Savings Plan




TD AMERITRADE 529 College Savings Plan




DC 529 College Savings Program




College Savings Plan




MOST 529 College Savings Plan



Source: Costs are projected over 10 years.

These costs come from a variety of sources. In Montana's plan, the investment choices themselves often carry expense ratios of 2% or more. Nebraska's two plans seem to offer the same investment options from Vanguard, Fidelity, Goldman Sachs (NYSE: GS  ) , and Allianz's (NYSE: AZ  ) PIMCO. But for the TD AMERITRADE (Nasdaq: AMTD  ) plan, there's a 0.85% annual fee, whereas the other plan tacks on just 0.60%.

Invest smarter
Fees aren't the only consideration you need to pay attention to in picking a 529 plan. Some states offer income tax breaks to residents who choose their own state's plan. But before you automatically choose your own state, make sure the added costs won't outweigh the potential benefits.

Choosing a 529 plan seems complicated, but it doesn't have to be. By focusing on costs, you can make sure you keep as much of your hard-earned money as possible for your children's education.

Stay tuned each Wednesday in September and October as Dan goes through the ins and outs of saving and paying for college.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger was glad to spend down one of his bad 529 plans on his wife's library degree. He invests in Ohio's 529 plan but doesn't own shares of the companies mentioned. The Fool owns shares of Legg Mason. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy always educates you.

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  • Report this Comment On September 30, 2010, at 12:24 PM, Knightmare535 wrote:

    About 9 years ago, I researched education plans and went with an Education Savings Account (Education IRA) directly with Vanguard. Going on memory here, but I believe I went that way due to lower costs and ease of going between schools. Can anyone give me a quick comparison of the pros and cons of each type of education account?

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