Tuesday, October 13, 2009

College Savings Plan

By Eric Gursky

June 16 (Bloomberg) -- If you are saving for college in a 529 plan, you probably took a bigger hit than you expected during the 2008 market crash.

What should you do now? Keep the plan or dump it?

My opinion: Stay in the 529 world but in a smarter way. These plans, run by the states, can be a great, tax-saving way to put aside money for college. You invest with after-tax dollars but the earnings are tax-free if they are used to pay for higher education.

Thirty-four states and the District of Columbia encourage contributions by giving you credits or deductions on your state tax return. You can buy a 529 from the state, at a low cost. Or buy at a high cost from stockbrokers and financial planners.

Smart idea No. 1: Buy through the state. When you open a 529, you have a wide variety of investment choices. The most popular are the age-based plans. They buy stocks while a child is young and promise to grow more conservative in the years just before college entry. Good age-based funds keep their promise. You have plenty of cash on hand when the tuition comes due.

Irresponsible age-based funds gamble on earning higher returns. They continue to hold a large proportion of stocks and risky bonds, even for 19- and 20-year-olds. These are the funds that get parents into trouble. If you are paying tuition this year, 20 percent or more of your college money might be gone.

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