529 College Savings Plans Post Mediocre Returns

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In an effort to prepare for the college costs and take advantage of potential tax savings, many American families are enrolling in state-sponsored prepaid tuition and college savings 529 plans. But 529 plans have not performed well in many states due to lackluster investment returns and relatively high fees, the LA Times reports. The most successful of California's Golden State Scholarshare funds has been the guaranteed option – much like a savings account – which has paid 4.29 percent per year for five years. Other Scholarshare funds have had returns ranging from a high of 1.8 percent to a low of negative 3.68 percent, LA Times reports.

Ohio will introduce CD's as an investment in their 529 College Savings plans, with varying terms, up to 10 and 12 years, according to the Wall Street Journal. Jacqueline Williams, executive director of the Ohio Tuition Trust Authority, says that the CDs are designed to for parents with young children. They will offer “safety, security and (Federal Deposit Insurance Company (FDIC) backing, she told the Journal. Other states are considering similar investment offerings.

At the request of Congress, the Securities and Exchange Commission (SEC) is currently working on oversight of 529 plans, according to USAToday. In its first action against a state-sponsored plan, the SEC settled with the Utah Educational Savings Plan for failures in its plan that allowed an individual to embezzle $85,000. Despite the scandal, the amount of money in Utah's plan has grown to $1.1 billion from $750 million a year ago, USAToday reports. Virginia's College Savings Plan, the nation's largest, had $10.1 billion in assets at the end of the first quarter, according to the Wall Street Journal.

The tax advantages offered in many states, where contributions to college savings plans are deductible, and the flexibility of this type of plan, prove very attractive to families. Anyone can donate to the plan, including grandparents, and the plans provide estate planning options, Reuters reports. A new beneficiary may be named as long as the new beneficiary is a relative. The owner of the plan is the donor, usually the parent, and the money in the plan does not affect the student's eligibility for financial aid. Withdrawals are not subject to federal income tax if they are used for education.

Prepaid tuition plans are used to pay future tuition at today's rate in an environment in which annual increases are alarmingly high. The disadvantage of treh prepaid tuition plan is that once funds are withdrawn, they count as the student's asset, and against any future financial aid package. These plans pay just for tuition, according to BankRate.com.

Families should check out their own state plans first, because of the likely tax advantage, and review their investment options, USAToday says. Bankrate.com recommends that potential investors check fees on www.savingforcollege.com, a web site dedicated to 529 plans. Donors may switch 529 plans every twelve months, but families should study options carefully before contracting with a plan, USAToday says.


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