For most parents, saving for college feels like climbing to the summit of a very tall mountain. And it doesn't help that the path keeps getting steeper; tuition hikes have far exceeded inflation over the past several decades. If your child is a newborn, expect a degree from a four-year, in-state public college to run about
Luckily, tools are available to help you scale the heights. State-sponsored investment programs known as 529 plans, as well as other kinds of savings programs, can provide the momentum you need to reach your goal. And you probably won't need to save the full amount. Most families get a discount in the form of grants, scholarships and education tax breaks and use loans to fill the gap--more than two-thirds of college seniors graduate with student debt.
A more realistic goal: Save about one-third of your expected college costs. When the time comes, current income, grants and loans can cover the rest. "Planning ahead is the key," says
The best place to save is in a 529 plan. Sponsored by 48 states and the
There are a few drawbacks. If you cash out for non-college purposes, you'll owe income tax and a 10% penalty on earnings (but not on contributions). You may have to return any state tax deductions, too. Plus, you're limited to the investment options in your plan. After you pick a portfolio, you must wait 12 months before you can change the investment mix or transfer the money to another plan.
Buy a 529 plan directly from your state if it offers a tax break. Most states offer two types of college-savings plans: a low-cost plan sold directly by the state and a higher-cost plan sold by a broker. The lower expenses of a direct-sold plan mean more of your money will go toward building your college fund. And in most cases, the state tax break will trump lower fees in an out-of-state program. (Go to the Vanguard 529 State Tax Deduction Calculator or Savingforcollege.com's State Tax 529 Calculator to find out what your potential tax savings would be in your state plan.)
If your state doesn't offer a tax break--or if you live in
States generally offer an array of choices, including age-based portfolios, which adjust the mix of investments automatically to become more conservative as your child ages; funds that focus on stocks or bonds (or both); and guaranteed-principal or principal-protected funds. But some plans offer better-performing funds and a more diversified mix of investments than others. And some plans charge lower maintenance fees, have funds with lower annual expense ratios, or both.
With the help of several databases--including research firm
Best for hands-on investors: The solid funds in the Utah Educational Savings Plan are mostly index-based. They include 18 from Vanguard and 6 from
Best for low fees: New York's 529 College Savings Program uses Vanguard funds, so it should come as no surprise that it has low costs. The average expense ratio charged by its underlying funds (0.17%, according to
We also like that the plan offers three age-based tracks with different risk profiles: aggressive, moderate and conservative. The aggressive track starts at birth with 100% in stocks and ends with 0% in stocks at age 19 (it's 25% in the last three years of high school). New York's age-based portfolios don't include an international stock fund. But the program's assortment of individual funds does have a foreign-stock option:
Best age-based plan for aggressive investors: If an aggressive track with top-tier funds is what you seek, you'll find it in the Maryland College Investment Plan. From birth through age 4, the portfolio holds 100% stocks--including stocks in developed and emerging countries. As your child ages, the track adjusts every three years, ticking down its stock investments to 40% when your child hits age 14 and 23% at age 18. By contrast, the average 529 plan's age-based allocation to stocks is 80% in the early years and 10% at age 19.
What's more, Maryland's 529 plan is packed with good funds from
Best age-based plan for conservative investors: This one is tricky. Some conservative age-based tracks are simply too conservative. The conservative age-based track of New York's 529 plan, for instance, sets out at birth with 50% invested in stocks and pares that to zero by age 11. But at that age, you still have six or seven years before your child matriculates, and stocks offer the best chance of increasing the size of your portfolio. That's why we like Utah's moderate and conservative tracks for conservative investors. In the early years, both tracks load up on stocks (80% in moderate; 60% in conservative), but the mix trickles down to 0% stocks by age 19 in the moderate trajectory, and it goes to 0% by age 13 in the conservative path.
Best for nervous Nellies: After 2008, many plans added savings options backed by the
Best if you want hand-holding: Rather have an adviser do all of the work? That can be okay. Some fee-only advisers, such as
But if your adviser puts you in an adviser-sold plan, consider yourself warned: You'll pay for that. Funds in adviser-sold plans cost an average of 1.28% in annual expenses, more than double the 0.60% average expense ratio for funds in direct-sold plans, according to
If you think the hand-holding is worth the cost, go with Virginia's College America plan. It holds many top-notch