Advertisement
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.

Advertisement - Article continues below

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.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

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.

Advertisement - Article continues below

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.

Advertisement

About the Author

Deborah L. Meyer, CPA/PFS, CFP®

CEO, WorthyNest LLC

Deborah L. Meyer, CPA/PFS, CFP®, is a fee-only financial planner and investment adviser based in greater Saint Louis. As the owner of WorthyNest, Deb helps conscientious parents build wealth. She is a proud member of NAPFA, Fee-Only Network, XY Planning Network, and the AICPA. Deb is passionate about family, faith, finance and travel. In fact, she is blogging about her family's recent three-month adventure in Spain.

Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
How To Buy a Roth IRA When You Make Too Much To Qualify For One
Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into …
September 23, 2020
High-Tech Aids for Aging in Place
Caregiving

High-Tech Aids for Aging in Place

Apple Watch and other technology provides fast feedback, comfort for older users, and a powerful assist for caregivers.
September 23, 2020

Recommended

When Is Amazon Prime Day 2020?
spending

When Is Amazon Prime Day 2020?

Circumstances beyond its control have forced Amazon to move its annual Christmas-in-July Amazon Prime Day blowout sale in 2020 to ... later. Is Oct. …
September 22, 2020
Check Your Financial Adviser Now (and Every Year) or Regret It Later
wealth management

Check Your Financial Adviser Now (and Every Year) or Regret It Later

Fewer than 10% of investors use such free background checks as Investor.gov, BrokerCheck or IAPD to check their financial advisers’ backgrounds. These…
September 21, 2020
A Step-by-Step Guide to Being an Estate Executor
retirement

A Step-by-Step Guide to Being an Estate Executor

Whether you’re planning ahead for your own heirs or have been asked to serve as an executor of an estate for someone else, it pays to understand what …
September 17, 2020
10 Things You'll Spend Less on in Retirement
retirement

10 Things You'll Spend Less on in Retirement

We spend a lot of time worrying about running out of cash in retirement. But you might be surprised to see some of the things you'll find yourself spe…
September 16, 2020