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College Savings Math

Mary Dalrymple
November 28, 2006

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 typical