college is one of the toughest assignments
a parent will ever face. Contrary to what some financial advisors
recommend, trying to oversimplify your savings strategy can lead
to your missing out on some lucrative opportunities that will
boost your children's chances of emerging from college without an
insurmountable pile of debt.
Earlier this week, Morningstar announced a new rating system
for evaluating college-savings plans, also known as 529 plans.
Although these ratings do a good job of steering you in the right
direction to take advantage of the tax savings that 529 plans
offer, picking a 529 plan shouldn't be the only thing you do to
save for your children's college education.
The savings juggling act
Among the many financial obligations people have,
saving for their children's college education
falls into somewhat of a gray area. On one hand, the amount of
money involved is large enough that you can't just expect to
cover the full cost out of your paycheck during your child's
college years. Instead, most people will have to treat it like
any other major savings goal, such as buying a house or saving
for retirement, putting aside a little money every month and
taking baby steps toward the eventual finish line.
Yet college is also exceedingly difficult to plan for. Costs
are constantly increasing, yet if your child gets a scholarship
or other lucrative financial aid package, then you may end up
having to pay only a fraction of what you expected. Moreover,
because many parents face college costs at exactly the same time
they're starting to ramp up their savings for their retirement,
there are competing interests that can knock your college savings
try to make college saving easier by acting somewhat like a
401(k) does for retirement saving. The plans allow you to choose
from menus of investment options, directing regular monthly
contributions toward investments that will hopefully grow
sufficiently to meet college expenses.
The best and worst 529 plans
Looking at Morningstar's ratings, the 529 plans that received a
coveted Gold rating featured low-cost investments from companies
including Vanguard and
T. Rowe Price
(Nasdaq: TROW) . Although only four states had Gold-rated plans
-- Alaska, Maryland, Utah, and Nevada -- college-savers from
around the country can take advantage of those plans. You'll find
similar low-cost features among the Silver-rated 529 plans as
well, with Vanguard, TIAA-CREF,
's iShares, and American Funds featured prominently among the
plans' investment options.
Conversely, the plans that came up short on Morningstar's
ratings tended to have poor performance and high fees.
) for having costly expense ratios on its investments, while
also scored poorly with its direct-sold and advisor-sold 529
plans due to poor investment performance.
Adding some spice to your savings
Regardless of how good a plan you choose, the
problem with 529 plans
is that they restrict your options. You can't invest in
individual stocks, and you're stuck with whatever funds a given
state chooses to support. The states that top the list arguably
have the most flexible, lowest-cost funds, but they're still
, with all the limitations funds have. Some players, including
) and Fidelity, have even decided to stop managing 529 plans as
pressure on fees has become stronger.
The smart move is to combine 529 plans with other college
savings methods. A Coverdell ESA, for instance, lets you invest
in individual stocks and other securities, albeit with a very
small $2,000 maximum contribution. But with access to mortgage
American Capital Agency
(Nasdaq: AGNC) , midstream energy specialist
(Nasdaq: LINE) , and other
high-yielding dividend stocks, you can use a Coverdell to get
similar tax benefits that 529 plans offer while boosting your
portfolio income. Custodial accounts or simply setting money
aside in your regular brokerage account gives you maximum
flexibility, but you don't get the advantage of tax-free
distributions from 529 plans for college expenses. Yet by
balancing these different kinds of savings vehicles, you can save
in ways that align well with your own resources and goals.
The smart move
As hard as it is to save for college, it's one of the best gifts
you can give your kids. By making the most of the savings options
available to you, you can ensure that your kids will have the
best start possible to their adult lives.
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like college saving. The best investing approach is simply to
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Tune in every Monday and Wednesday for Dan's columns on
retirement, investing, and personal finance.
Fool contributor Dan Caplinger owns warrants on Wells
Fargo.You can follow him on Twitter @DanCaplinger. The Motley
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