National 529 College Savings Plan Day
Planning for higher education costs is frequently a topic we discuss with our Clients. It can be tricky to decide when and how to start saving because of the unknown factors that make estimating college costs challenging. We have used this space before to discuss the pros and cons of using a 529 plan as part of one’s approach to saving for college. Today, in honor of National 529 College Savings Plan Day on the 29th of May, we thought it would be worthwhile to revisit the topic to share more on the two forms of plans and our thoughts on the best available plans.
Let’s start by briefly explaining what a 529 plan is. 529s are tax advantage plans that come in two forms – pre-paid tuition plans and savings plans.
- Pre-paid tuition plans enable the account owner to pay for the beneficiary’s tuition and fees in advance. The benefit of doing so is “locking in” the beneficiary’s education costs at current rates instead of paying them at higher rates in the future. According to CollegeBoard, in-state tuition and fees at public four-year institutions have increased by about 4% per year over the past 30 years; FinAid.org reviewed every 17-year period from 1958 to 2001 and determined tuition inflation rates were between 6 and 9% per year. Looking forward, Savingforcollege.com projects tuition and fees will increase by 5% per year in the coming decades. Yeske Buie takes a more conservative approach and projects that tuition inflation rates will be 7% in the projections we prepare for our Clients.
- Savings plans, on the other hand, allow for tax-advantage savings for qualified education expenses. Contributions to a 529 grow on a tax-deferred basis and distributions for tuition, fees, books, and other qualified expenses are tax-free.
For our Clients, we generally recommend Utah’s Educational Savings Plan (UESP) because the investment options available through their program enable us to create robust, diverse, low-cost portfolios that are almost a perfect match to what we can construct in our existing Client accounts. Through UESP, we’re able to select Dimensional Fund Advisors (DFA) mutual funds without paying an additional fee (unlike other states’ plans) and we supplement those investments with a few mutual funds from Vanguard, just as we do in our standard portfolio model. While there are other 529 plans that offer DFA mutual funds, none allow as much flexibility in constructing portfolio models as UESP. We also use customized age-based portfolio models to invest the contributions to the accounts – as the child approaches their college years, we notch the stock allocation down and increase the bond allocation to help ensure the funds are available for their expenses when the time comes, not unlike the approach we take with our Clients as they approach retirement.
If you have more questions about how 529s can be used effectively as a college planning tool, please don’t hesitate to reach out to member of our financial planning team. And if you’d like to take an active role in celebrating National 529 Day, Savingforcollege.com is hosting a webinar on Wednesday, May 24th at 1:00pm ET during which industry experts will offer comments and answer questions. The webinar is free; click here for more information.