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What's the Best Way to Save for College?

Jul 5, 2012

Between a prepaid tuition plan and a 529 college savings plan, a 529 college savings plan is the better choice. With a prepaid tuition plan, you're basically paying for future tuition at in-state public schools at today's prices. This looks like a great deal, but it is not risk free.

"Most of the prepaid tuition plans are operating at an actuarial loss, signifying that they don't have sufficient assets to pay for future obligations," says Mark Kantrowitz, publisher of FinAid.org and Fastweb.com and author of Secrets to Winning a Scholarship. 
"The programs may be guaranteed, but only one-third of the plans have any kind of a state guarantee. And it isn't clear exactly what that means." 

In other words, you may be left with a bad investment.

A 529 college savings plan isn't risk-free, either, but that risk can be managed. "Select an age-based asset allocation, which starts off with an aggressive mix of investments and gradually shifts to a less risky mix as college approaches," Kantrowitz says. You should also stick with a direct-sold 529 plan, which carries lower fees than an adviser-sold version.

The only reason in which it could make sense to consider a prepaid tuition plan is in the case of divorce — if parents have agreed to divide college costs and one would like to take care of his or her college support obligation in advance.

Unfortunately, some states don't offer a 529 college savings plan, so families who want to put money into a 529 will have to look elsewhere. You can invest in any state's 529 plan; pay attention to fees, and if you can, choose a plan with lower expenses, such as those managed by Fidelity, Vanguard, or TIAA-CREF.

Got further questions? Catch me on twitter and DM me @529SavingsPlans or e-mail me at 529CollegePlans at Gmail.com. Want to be heard? Leave a reader comment below.

1 comment

  1. No matter which way you save for college you must first have your money budgeted. Or you won't have any money to save.

    ReplyDelete

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