529 savings plans
SACRAMENTO, Calif. — With three school-age daughters, Rob Lindgren, a stay-at-home dad whose wife is a Sacramento State University professor, is sure that all his kids will attend college someday.
But how to pay for it? That's not quite so clear.
A decade ago, the couple opened an investment account for their oldest daughter, Bonnie, who's now 15, but it got beat up by the stock market's slump in 2000-01. They still have the account, but "when things went south, it was pretty discouraging."
The Lindgrens are now motivated to get going again. "Tuition and fees are rapidly increasing, loan rates are increasing. ... We need to set aside some money to address those future costs," said Lindgren.
That's what officials at California's ScholarShare program like to hear. As the state's official 529 college savings plan, a ScholarShare investment account offers tax-free savings, as long as the money is spent on higher education costs.
Run by the California Treasurer's Office, ScholarShare is one of 117 state-sponsored 529 plans nationwide.
"It's like a 401(k) for college savings," said Brian Aguilar, a staff analyst in the California Treasurer's Office, who recently discussed 529s with families at the downtown Sacramento Public Library.
"There's no tax on the interest earned, so you could have a sizable pot of money when your child is ready to go to college," he noted.
In most cases, you don't have to be a resident to purchase that state's plan. And it doesn't matter where you live or where your student goes to college.
You can live in California, have a 529 plan in Colorado and apply it to your kid's college in Oregon.
You don't have to be a parent or grandparent, either. You can open a 529 for a friend's child or a niece or nephew, or even for yourself.
You choose the type of investments for your contributions. Some, for instance, are "age-based" funds based on how many years until your child turns 18 and starts college. In younger years, the funds are more heavily weighted in stocks. They shift to more conservative investments as a child nears college age.
Accounts are managed by investment funds such as Fidelity, Schwab, TIAA-CREF and Vanguard. As with any investment, there are no guaranteed rates of return. According to Morningstar.com, the five-year returns for 529 plans averaged 3.3 percent.
John Chan, a retired Sacramento County employee, opened separate 529 plans several years ago for each of his four grandchildren, now ages 8 to 16. He and his wife were motivated by the escalating cost of college tuition.
"If we can help our grandchildren bypass having to take out (college loans), it'll be so much easier for them — and their parents," said Chan.
In the past decade, tuition and fees at four-year public universities increased by an average of 5.6 percent a year, according to College Board statistics.
Financial planners say 529s can be a terrific tool for college savings. Cynthia Meyers, a certified financial planner in Sacramento, says the key is selecting a plan "with a good variety of diversified investment choices ... and one with consistently low expense ratios."
Under ScholarShare's new TIAA-CREF manager, fees are projected to range between 0.18 and 0.62 percent, considerably lower than now.
And 529 plans have some advantages over other types of college savings vehicles, Meyers said. Unlike a Uniform Gift to Minors (UGMA) account, where a child has access to the money at age 18 or 21, a 529 stays in the account holder's name and control. And if your child doesn't attend college and you want to take the money back, the penalties and taxes apply only to the earnings, not the full amount withdrawn.
Because 529s are held in a parent's or adult's name, not the student's, they also have less impact on financial aid eligibility, according to FinAid.org, the nonprofit clearinghouse on college savings. On federal financial aid forms, a parent's asset, such as a 529, is assessed at a far lower rate than those in a child's name. That gives 529s an advantage over other types of college savings, including UGMAs.
You can compare 529 plans at websites such as SavingForCollege.com and Morningstar.com.
Another option for some families is the Private College 529 Plan. Launched in 2003, it's a prepaid tuition plan for parents who anticipate their son or daughter might be interested in — and accepted to — a private college or university.
The only 529 of its kind in the country, it locks in today's private-college tuition rates for up to 30 years. The rates are guaranteed by the 270 participating colleges, which range from small faith-based, women's and historically black colleges to large powerhouses such as MIT.
"We're not for everyone, and we know it," said Nancy Farmer, president of the St. Louis-based Private College 529 Plan. It's for "solid, middle-class families who may not qualify for financial aid but want the security of saving for a private college education."
Currently, the plan has about 6,500 families and holds more than $200 million in combined assets.
What if your kid doesn't get accepted or doesn't even apply to a private college? You have several options: change the plan's beneficiary to another family member (including yourself), roll it into a state-sponsored 529 plan or request a refund. But note: A refund will trigger tax consequences, just as withdrawals from a regular 529 plan, if not used for college expenses.
In addition to a 529, some parents reap substantial savings by having their student attend a local community college for two years, then transfer to a four-year university.
That's what Sacramento high school teacher Mirna Jope and her husband, a federal employee, did with their four teens, now ages 19 to 25.
"We have a good income, but there's no reason to pay full cost for a four-year degree when you can get the same education at community college," said Jope. "Why pay $15,000 a year when you could pay $1,500?"
The two oldest Jope kids enrolled at the University of California-Santa Barbara and the University of California-Los Angeles after attending community college. The two youngest are attending American River College with plans to transfer to either California State University-Sacramento or an East Coast college.
Each had a ScholarShare account, set up several years ago by their grandparents.
Jope, an Encina High School teacher, said her kids' 529 savings accounts have helped cover tuition, books and housing costs. "It's the gift that keeps on giving."