Six Reasons Why You’re Missing Out on Free Money for College

29 May 2015 | Author: | No comments yet »

529 vs. 401(k): How to Save For College Without Hurting Your Retirement.

Despite being promoted for more than a decade as the best way to save for college, 529 plans are a mystery to almost two-thirds of American families. Friday (May 29) marks the 6th annual national 529 day, which calls attention to the ubiquity of so-called 529 plans – tax-advantaged college savings plans named for the part of the tax code that exempts earnings and withdrawals from the plans from taxes.

Struggling to figure out how they’ll pay for rising college costs, some parents are willing to dip into their retirement savings and delay retirement but may not realize that in doing so they may be jeopardizing their own financial security.And on Friday, May 29 or “529 Day ” — a reference to the 529 plans that allow a person to set aside tax-advantaged funds for future college or university costs — the agency will match up to $25 invested in new savings accounts. “National 529 College Savings Day is a perfect time to start investing for future qualified higher education expenses if you aren’t already,” UESP director Lynne Ward said in a prepared statement. “Even small contributions to a low-cost, flexible UESP account can go a long way toward making college affordable for families of all income levels.” To receive the matching funds, a new account and a minimum $25 contribution must be made by 11:59 pm on Friday with the promotional code “MAY29SAVE4COLLEGE” on account agreements.

Some parents may not mind delaying retirement or may believe that using their retirement fund is the best alternative to help their child pay for college. The Morningstar Analyst Rating for 529 plans, expressed as Gold, Silver, Bronze, Neutral, or Negative, is a forward-looking, qualitative rating that represents Morningstar’s conviction in the plans’ abilities to outperform their relevant benchmark and peer groups on a risk-adjusted basis over the long term.

Account withdrawals for qualified expenses, such as tuition and fees, books, supplies and some housing costs, are exempt from federal and state income taxes, and a 5 percent state tax credit can be claimed on contributions to Educational Savings Plan Accounts. In the study, Morningstar analysts outline the five key pillars they evaluate to arrive at a rating—People, Process, Parent, Performance, and Price—and provide examples of best practices for each pillar. More than 70% of college graduates leave school with student debt and there’s no end in sight to the trend of debt-financed college, as tuition continues to skyrocket. “Saving for college is better than not saving for college,” Kantrowitz said. “Every dollar you save is a dollar less you’re going to have to borrow.” These programs allow parents to lock in tuition payments years in advance typically at a rate slightly higher than current prices to protect against tuition inflation.

The report also quantifies the federal tax benefits of 529 plans by comparing back-tested, after-tax results of various 529 portfolios with similarly managed open-end mutual funds. “As assets in college-savings plans continue to grow, we’re focused on helping college savers select the best program to meet their goals,” Leo Acheson, a Morningstar analyst and the study’s lead author, said. “Our research aims to differentiate between plans and shows the strongest 529 programs feature asset managers that follow prudent processes, offer high-quality investment options, and benefit from strong oversight and attractive fees.” Process: Hiring experienced asset allocators with strong records of diversifying 529 portfolio investments over time or familiarity running similar investments. For example, New York’s 529 Advisor-Guided Program hired the JPMorgan SmartRetirement Target-Date Series team in 2012 to manage its age-based portfolios.

The Great Recession squeezed funding for many of these plans, making it difficult for them to keep up with payouts to account holders that match current tuition rates. “There was a period of time when tuition was growing way faster than everybody ever predicted and the stock market crashed so suddenly these funds became underfunded overnight,” said Lochner, who is also the director of Washington state’s prepaid plan. In that environment, some states froze their payouts at levels tied to the price of tuition in a certain year, stopped accepting new investors or simply shut down.

Thirty-three states offer state tax breaks or scholarships to residents who invest in college savings accounts that add, on average, the equivalent of 8.7% to your contributions. Ohio, Utah, and Massachusetts stand out for housing 529 plans under entities that are relatively free of political influence and for staffing the plans with employees whose sole or primary responsibilities are administering the plan. And earnings on any 529 investment can be used tax-free to pay for your child’s college expenses, which boosts the net value of your college savings over what you would earn in a regular investment account.

Only a handful of prepaid tuition plans – Florida, Massachusetts, Mississippi and Washington – are backed by the full faith and credit of the state, which is the most ideal guarantee, according to Joe Hurley, the founder of Rowe Price have earned an “A” Morningstar Stewardship GradeSM, which is designed to help identify fund companies that align their interests with fund shareholders. Some parents who have saved for college fear that their nest egg could turn into a financial hand grenade when their student applies for financial aid, says Lynn O’Shaughnessy, author of The College Solution.

For example, Virginia’s CollegeAmerica plan has demonstrated strong past performance, earning the highest average overall Morningstar RatingTM among advisor-sold peers. While the payouts can generally be used for tuition at colleges outside the state where the plan is offered, it may not cover the full cost of tuition at other schools. Morningstar analysts believe the Virginia CollegeAmerica plan will likely outpace competitors because of its attractive investment lineup, which currently features 18 Morningstar Medalists. I can’t afford the contribution minimums: A lot of families get paralyzed by the idea that they can’t put a large sum aside, and so they don’t save anything at all, says Betty Lochner, Director of the Guaranteed Education Tuition plan in the state of Washington. “They think it’s too steep a hill to climb, and it’s not,” she says.

Families have the option to invest the money in stock funds, bond funds and other places and they can have some discretion over the investments or higher an advisor to manage them. There are ways to hedge the account against stock market volatility, like setting it up so that the investments are more aggressive when your child is younger and become more conservative as they get older, according to Kantrowitz. “You can’t avoid the risk, but you can manage it,” he said.

Assets rose 9 percent to $218 billion as of Dec. 31, 2014, compared with $200 billion as of Dec. 31, 2013, as a result of net inflows and market appreciation. Though funds from 529 accounts can go to tuition and books, as well as room and board, there are some other expenses, like off-campus housing or laptops that may not qualify, according to Andy Lockwood, a Long Island, N.Y.-based college consultant. Think about this: You may be paying an interest rate of 13 percent or more on your credit cards—that’s much higher than the rate on most student loans, even if you end up having to borrow to pay the college bills.

States with 529 plans administered by some of the nation’s largest asset managers hold the greatest share of 529 assets, highlighting the importance of brand names and sales reach in the 529 industry. Though it’s hard to say whether that’s truly the case because the schools don’t publish their formulas, Lockwood said he’s noticed a pattern in aid awards, which indicates the schools are approaching the accounts in this way. Additional information and state-by-state comparisons can be found in the 529 Plan Center at Still, given the tax advantages, 529 plans can be a good bet for many families, Lockwood said. “A great type of person that would benefit from a 529 is someone that is not going to qualify for need-based aid plan, period,” he said, noting that it may still make sense for some families who would qualify for aid. The Free Application for Federal Student Aid considers 529 plans in a parent or dependent child’s name a parental asset and they have little effect on financial aid awards.

Morningstar’s 529 plan research and data also is available through Morningstar® Advisor WorkstationSM and Morningstar OfficeSM, its software platforms for financial advisors; and Morningstar DirectSM, its global investment analysis platform for institutional investors. Families who start putting money into a 529 account when their child is born will cover one-third of their college savings goal from the investments’ earnings, Kantrowitz said. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 15 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had more than $179 billion in assets under advisement and management as of March 31, 2015. Having a nightmare about your daughter going through a rebellious teenage phase and cashing out the college savings plan to finance a backpacking trip across Europe? Analyst Ratings are based on Morningstar analysts’ current expectations about future events and therefore involve unknown risks and uncertainties that may cause Morningstar’s expectations not to occur or to differ significantly from what was expected. Morningstar does not represent its Analyst Ratings to be guarantees nor should they be viewed as an assessment of a fund’s or the fund’s underlying securities’ creditworthiness.

This press release is for informational purposes only; any mention of a specific 529 college-savings plan should not be considered a solicitation by Morningstar. To view the original version on PR Newswire, visit:

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