This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Should You Open a College Savings Account?

NEW YORK ( TheStreet ) -- For a decade, fund companies have been marketing 529 college savings plans. But the financial crisis took a big toll on the plans. In 2008, the average plan lost 24%, according to Morningstar. Reacting to the big losses, politicians charged that the plans were too risky. Some critics argued that the fees were excessive for plain-vanilla investments.

Since the financial meltdown began, plans have taken steps to improve. Many 529 plans have cut expenses. Some funds have lowered risks. "In the last 12 months, 529 plans have become more compelling investments," says Laura Pavlenko Lutton, a Morningstar analyst.

Named for Section 529 of the Internal Revenue code, the plans have $119 billion in assets. The plans are designed for families who want to sock away money that can be used for college tuitions. Under the system, states sponsor plans and hire money managers to oversee the assets. Big players in the business include fund companies, such as Fidelity Investments, Franklin Resources (BEN - Get Report), and T. Rowe Price (TROW - Get Report). The 529 investments typically cost a bit more than comparable mutual funds, but savers like the plans because of the tax advantages. Earnings of the plan investments are not taxable -- provided the money is used to pay for education.

The wave of cost cutting began in December 2009 when Fidelity shaved its total annual fees on some investment options from 0.80% to 0.60%. Vanguard reduced its costs from 0.44% to 0.25%. Many other companies joined the cost-cutting spree.

Besides reducing expenses, some plans have sought to reach nervous parents by offering safer investment choices. TIAA-CREF rolled out conservative funds that have big allocations to fixed income. Plans sponsored by Massachusetts and other states offer FDIC-insured investments.

Should you open a college savings account? That depends on whether you think your child will attend college. If the child does not enroll, you could owe Washington a 10% penalty on the money that has been put into a college fund. Still, many states offer considerable incentives for families to participate in the 529 plans.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
BEN $51.23 0.00%
TROW $83.00 0.00%
AAPL $127.60 0.00%
FB $83.09 0.00%
GOOG $535.38 0.00%

Markets

DOW 18,034.93 +208.63 1.17%
S&P 500 2,100.40 +19.22 0.92%
NASDAQ 4,994.6020 +62.7870 1.27%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs