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College Savings Math

It's certainly not getting any cheaper to send the kids to college, but there's some good news for parents trying to build a college savings account. The expenses charged by state-sponsored 529 college savings plans have been falling.

Fidelity is the latest investment company to announce reductions in fees and expenses charged in its 529 plans. USA TODAY reported last Friday that Fidelity cut its fees after Vanguard, American Century, TIAA-CREF, and T. Rowe Price announced fee and expense reductions earlier this year.

The fee cuts have been spurred, in part, by a law passed earlier this year making sure that the tax benefits of using a 529 account won't disappear, as they had been scheduled to do at the end of the decade.

What tax benefits might those be? A 529 college savings plan acts much like an investment account and allows parents and others to save money for educational expenses. The money can grow tax-free as long as it's used to pay for tuition, fees, books, room and board, and other educational costs. (There's a tax and 10% penalty for withdrawing the funds for other reasons.) Some states even allow state residents with accounts to take a partial or total tax deduction for their contributions.

In one sense, the accounts are among the most flexible ways to save for college. Anyone can make a deposit to anyone's account. The contribution limits are very high, often more than $200,000. Many plans have no income limitations on participants. You typically don't even have to live in a state to participate in its 529 plan.

In another sense, the accounts don't offer the flexibility of other investment accounts because you can't directly manage the funds yourself. More akin to a workplace 401(k) retirement account, the typical 529 plan offers a limited menu of investment options in the form of mutual funds. An increasing number offer funds with investment mixes that automatically change as your child ages, getting more conservative as college approaches.

Because you're not limited to the 529 plans offered by your state, there's a mind-boggling array of options to consider. Fees should be at the top of your comparison shopping list. They can eat away at your college savings faster than your teenage son grows out of his expensive athletic shoes. So, break out your calculator and consider some of the fees to look for and compare:

  • Application fees: Many have none, but some have a one-time fee for opening an account.
  • Account maintenance fees: These typically take the form of an annual fee, sometimes waived for accounts that meet a certain minimum balance. A few plans also waive the fee when the account holder signs up to make automatic contributions.
  • Program management fees: These fees, if charged, are almost always less than 1% of the account's holdings. Even though that sounds tiny, small differences in fees can make a big difference over time. Higher expenses absorb money you could use later to buy your children's textbooks and tuition. Weigh these expenses with other fees and potential benefits, such as a state tax deduction for using your state's plan. Also, find out whether different investment options within a plan may have different program management fees.
  • Investment expenses: Some plans incorporate these fees into their program management fees. Others offer investments that come with expenses, just like mutual funds purchased through your brokerage. These fees will vary according to your investments, so look carefully at your investment choices before signing up for a plan.

As you can probably tell from that list, you've got your homework cut out for you if you want to understand plan fees and pick the right plan. You can glean a lot of information about expenses and compare different 529 plans at www.savingforcollege.com. NASD offers an online 529 expense analyzer that lets you compare the effect different plans' fees will have on your savings.

These 529 savings plans, of course, aren't the only way to save for college. You can learn more about other options at the College Savings Center. You could also check out The Motley Fool's Guide to Paying for School, by our very own Robert Brokamp.

Related Foolishness:

Motley Fool GreenLight, our new personal-finance newsletter service, can help you save and make the most of your money no matter what stage of life you're in. Check it out by signing up for a free 30-day trial today.

Fool contributor Mary Dalrymple welcomes your feedback. The Fool's disclosure policy is at all the cool kids' toga parties.


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