Fearless Finance™

College Savings Plans Still Most Attractive Vehicle for College Funding

Since the Oregonian’s story on December 19th highlighted the eye-popping 38% loss in the Oregon 529’s most “conservative” fund, I’ve had numerous clients ask me whether or not they should rely on 529 Plans to save for their children’s future education.  

Oregonian’s invested in the state’s plan have every right to be upset and concerned about the poor performance of  the Oppenheimer Core Bond Fund, which lost 38 percent of its value this year, when other comparable funds actually gained 4 percent.   Morningstar reported that the losses stemmed primarily from the fund’s considerable exposure to Mortgage-backed securities (the same type of toxic assets that have plagued investors all year).   The most shocking part of this large loss was that investors believed that their college savings were actually invested conservatively, but instead had a lot more exposure to stocks and corporate bonds than they were aware.  

While we cannot undo the past, it’s important not to throw the baby out with the proverbial bath water when it comes to 529 plans.   Though Oregon residents do get a small tax incentive to invest in their own state’s plan, you are not restricted from investing in another state 529.   You can actually invest in any of the state 529 plans (there are over 80) nationwide, and these are not all created equally.   In fact, according to Savingforcollege.com, which ranks the separate plans, Oregon’s ranks 37th in the nation on its three-year performance and 43rd on its one-year performance.  So, as with all investments, buyer beware.  Just as investors should compare the performance of mutual funds among other managers; the same is true of 529 investment managers.

Here are some key advantages offered by College 529 plans:

• Tax Savings:   The biggest tax incentives come at the federal level when funds are used to pay for college.  Although your contributions are made with after-tax dollars, your investments grow tax deferred—potentially boosting your investment growth.  
• Withdrawals are federally tax-free when used for qualified education expenses, such as tuition, fees, books, supplies, room and board.   You can even contribute a lump sum of up to $60,000 ($120,000 per couple) in a single year without incurring gift tax.
• For estate planning purposes—as an account holder you can move assets out of your taxable estate while still maintaining ownership and control of the assets.
• The beneficiary (the student) of the account can be changed at any time to an eligible member of the original beneficiary’s family without penalty.

When selecting a 529 plan, in addition to looking them up on Savingforcollege.com, you can also find useful information on Morningstar.com.     There, you will find the State and Name of the plan, the Plan Administrator, which is usually an investment firm, the plan’s expenses (which eat into your possible returns), performance, and underlying holdings.  Check the plans out thoroughly.  You can also see the various portfolio strategies, usually based on when your child expects to enter college.   Find out how your specific 529 plan is performing; don’t simply invest in a plan recommended by your state.  You could also consider opening a 529 plan in two different states, using two separate program administrators, which allows you to diversify your risk across investment managers.

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