529 Plans

A Deeper Dive into 529 College Plans

If you're confused about the difference between 529 college savings plans and prepaid tuition plans and all their ins and outs, you're not alone. But here's some help.

College savings is a hot topic with my clients, as many of them have at least one child living at home. In June, I wrote an overview article on 529 plans as a college savings strategy. Since then, I’ve fielded a couple of questions from parents and inquiries from college experts.

Today, let’s dive deeper into the two main types of 529 plans: savings and prepaid.

529 College Savings Plans

529 college savings plans are the more common type of 529 plan. You establish the plan in the state of your choosing (not necessarily your home state), either directly or through an adviser. Investments are selected that will hopefully increase over time.

As a fee-only Registered Investment Advisory (RIA) firm owner, I am always acting as a fiduciary and looking out for my clients’ best interests. Direct 529 savings plans are available for lower cost than their adviser-sold alternatives, so they typically “win” in my book. Nonetheless, any investor who directly opens a 529 savings plan account should know that there is underlying investment risk. It will fluctuate in value! Investment selections that are aggressive and equity-heavy will naturally have more price fluctuations because they are aligned with stock market performance.

529 savings plan balances grow tax-deferred and can be used for a plethora of higher-education expenses, including tuition, fees and room and board (for students enrolled at least half-time). State income tax deductions may be offered for 529 saving plan contributions, but deductions are state specific. My home state of Missouri is one of a few tax-parity states that offer a state income tax deduction even if funding an out-of-state 529 savings plan. Other states, such as California and North Carolina, offer no income tax deduction for 529 plan contributions.

Prepaid Tuition Plans

Within a prepaid plan, you buy tuition credits at a set price (typically a premium over the current cost of college) to be used for your child’s education years down the road. Historically, prepaid plans were state run and offered advance tuition credits for in-state universities only.

Private College 529 is the only 529 plan not run by a state, and the member college guarantees that your family purchases tomorrow’s tuition at today’s prices in the form of tuition certificates. My alma mater, Saint Louis University, is one of nearly 300 participating universities for Private College 529; view the full list here. Tuition can be used at any existing or future member schools. Another bonus? The account owner doesn’t pay any fee to establish or maintain the plan; all deposits are directly used to pay tuition. Consult this FAQ section for all the details on prepaid plans from Private College 529. One downside? Prepaid plans usually can only be applied to tuition and mandatory fees — not room and board.

Market Risk

One major benefit of the prepaid, Private College 529 plan is that you avoid market risk. Let’s say your son is five years away from attending college and you put $10,000 into the prepaid plan now. Suppose that covers 40% of first-year tuition (which currently runs at $25,000); it will still cover 40% of the first-year tuition at your son’s private college in five years.

If instead, you opened a 529 Savings Plan and funded it with $10,000 today, the account may only be worth $8,000 when your son needs it in five years. Tuition may have increased to $30,000, so you’re only funding 26.7% of first year tuition in that scenario. If you’re optimistic, suppose you contribute $10,000 to a 529 savings plan today and it increases to $14,000 in five years. If tuition is $30,000 in five years, you’ve funded 46.7% of first-year tuition. That percentage variance is solely attributable to investment performance.

Still Confused?

For you visual learners, my wordy explanation above may be too much. Instead, here’s a comparison tool between a state-run 529 college savings plan and the prepaid Private College 529:

 529 Plan Type
DescriptionSavingsPrepaid
(Private College)
Account earnings grow tax-deferred
Can change beneficiary designation
Choice of colleges to attend
Counted as parental, not student, asset on FAFSA
State run 
Direct or adviser-sold plans 
State income tax deductions available 
Room and board are "qualified expenses" 
Tomorrow's tuition for today's dollars 
No market, or investment, risk 
No fees paid by the account owner 

Wrapping it Up

It would be wise to open a prepaid Private College 529 if you are insistent on sending one or more of your children to an eligible private university and want to lock in today’s tuition rates. If you want more flexibility and are willing to take some investment risk, the 529 savings plan could be a better alternative. Some families open one of each 529 plan (prepaid and savings).

Did you find this article helpful? Then please share it.

If you have additional questions about 529 plans or college savings, SavingforCollege.com is an excellent resource. I’m now one of their Financial Pros with access to premium tools and calculators and am also happy to talk about your specific situation. Click here if you’d like to set up a complimentary consultation with me.

About the Author

Deborah L. Meyer, CPA/PFS, CFP®

CEO, WorthyNest LLC

Deborah L. Meyer, CFP®, CPA/PFS, CEPA and AFCPE® Member, is the award-winning author of Redefining Family Wealth: A Parent’s Guide to Purposeful Living. Deb is the CEO of WorthyNest®, a fee-only, fiduciary wealth management firm that helps Christian parents and Christian entrepreneurs across the U.S. integrate faith and family into financial decision-making. She also provides accounting, exit planning and tax strategies to family-owned businesses through SV CPA Services

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your stimulus checks.
February 19, 2021
Want More Tax-Free Retirement Income? One Man’s Whole Life Decision
life insurance

Want More Tax-Free Retirement Income? One Man’s Whole Life Decision

Whole life insurance might not be something that’s on your retirement planning radar, but for this client, here’s how it served his need to control ta…
February 23, 2021
The Current Plan for $1,400 Checks
Coronavirus and Your Money

The Current Plan for $1,400 Checks

Here's what you need to know about the stimulus check plan currently being considered in Congress for President Biden's COVID-relief package.
February 18, 2021

Recommended

33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
February 24, 2021
Switch Accounts for a Better Yield?
Financial Planning

Switch Accounts for a Better Yield?

If your current account has a reliable history of strong yields, it might be worth sticking around.
February 23, 2021
Money Conversations You Should Have Before Marriage
Brandon Copeland

Money Conversations You Should Have Before Marriage

Kiplinger.com contributing editor and NFL linebacker Brandon Copeland has Valentine's Day (and beyond) advice for couples who want to improve their fi…
February 11, 2021
4 Ways Broke Grad Students Can Raise Their Income While Still in School
college

4 Ways Broke Grad Students Can Raise Their Income While Still in School

Grad students can lighten their financial loads by targeting specific opportunities as they complete their studies. Here are four places to start look…
February 10, 2021