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Good News for College-Bound Students: Fees Dropping in 2014 for 529 College Savings Plans

By Justin Stoltzfus – Updated Mar 7, 2017 at 2:36PM

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529 college savings plans have long been a reliable vehicle for college funding. Now, they're getting even better. Find out how the costs of many of these investment vehicles for higher education are coming down significantly.

Those who want to put money into a 529 college savings plan should know about how these kinds of investment opportunities have been revamped and improved during recent years. Now, some of the newest reports on these useful investment vehicles for higher education show that the costs of many of these plans are coming down significantly.

A Jan. 10 piece in U.S. News & World Report goes over the details of how higher education experts are seeing costs go down for a variety of 529 plans. For example, the report cites information from public officials in the state of Pennsylvania, where fees are expected to drop by more than 20% overall.

This report also goes into some of the reasons why parents are getting more for their money when they opt for a 529. Interestingly, rather than new federal guidelines or expanded rules on 529s, these savings owe to the fact that fund managers are simply charging less for their services.

The context of lower plan fees
There are a couple of things at work here. Reports about the 529 changes for 2014 are suggesting that there is a kind of "race to the bottom," which is somewhat common in various parts of the business world, where fund managers are competing with each other to offer lower prices.

However, there's also a greater context. We previously reported on how hedge fund managers, in general, were backing away from a traditional high-cost price model for their services. The same thing could be true here with 529s. In some indirect ways, the hedge fund market could also have an impact on how much parents or guardians pay for the college plans.

Analysts also suspect that some 529s are moving toward less expensive investment models. More passive investment vehicles need less active management -- you don't have to pay people to sit there buying and selling individual equities or products -- and that can translate to savings for customers.

Other expansions of 529 purchasing power
New lower plan fees aren't the only reason that parents are now able to get more out of the dollars they put into 529 savings plans. For example, with the right kind of planning, those who are setting up these plans for their children can pay for more types of educational costs with the funds than in past years.

Some types of 529 expenses are qualified by the IRS on a case-by-case basis. However, in many cases, it's possible for parents to pay for room and board up to a certain amount with 529 money. Also, as technology becomes a bigger part of education, the IRS is more likely to allow extra 529 coverage for expenses like laptops, tablets, and mobile devices, as well as educational software and digital versions of textbooks and study guides. This means that more of the things you would buy with your Kindle could be paid for with a 529 plan.

What's behind 529 plan savings?
Even with these new announcements about college plan advantages, many heads of household don't really know about how these plans help families to afford higher education.

The basic fundamentals of 529 plan investment are that those who contribute can invest that money tax-free for all of the years before a child starts at a college or university. Since that's nearly two decades, there are a lot of ways that the money can grow during that time. By allowing this capital to grow tax-free rather than affecting annual filing, a 529 plan makes an excellent way to save more of what you make if you're planning to pay for post-secondary education for a family member.

That's basically what a 529 plan is. In fact, not many people know that these plans are actually named for a section of the tax law that offers the opportunity for tax-free education planning. Too many people think that a 529 plan is just a hedge fund offering or some kind of financial product sold only to the wealthy. Getting a firsthand look at these plans destroys that myth effectively. In most cases, there aren't sky-high minimum contributions or other barriers for middle-class families to get involved in these kinds of savings, which are basically handed out by the federal government, not by a bank or financial institution.

Using tools like college 529 plans, a good individual retirement account or 401(k), and other kinds of tax-related investment vehicles, individuals can save and grow more capital as they edge toward the end of their working lives.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Justin Stoltzfus is a contributor to WiserAdvisor.

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