Friday, June 06, 2008

8 College Savings Myths

I received this in some Fidelity Email a while back. -

Eight College-Savings Myths
Saving is not a bad thing
By Joanna Woodworth

In 2007, according to the College Board, the average financial aid package totaled $9,500 covering 43% of tuition, fees, and room and board for one year at the average four-year college, public or private.1 This underscores the need for families to save in a dedicated college savings account to supplement the remaining costs. However, 60% of parents think that if they save too much toward their child's future education that it could negatively affect their child's chances of receiving financial aid.2 And that is just one myth about saving for college. Here are the other seven.

Myth 1: Saving in a 529 plan will affect my child's eligibility to receive financial aid This is one of the more common myths with regards to 529 college savings plans. According to the federal financial aid formula, parent-owned assets are assessed at approximately 5%, compared with 20% of the child's assets. In actuality, investing in a 529 plan will have a relatively small impact on financial aid because those assets are considered those of the parent, not the child. Furthermore, other savings accounts, such as an UGMA/UTMA, where assets are considered those of the child or beneficiary, tend to have a greater affect on financial aid.

Myth 2: I shouldn't risk investing my money in a college savings account when the market is so volatile No one has the ability to predict how the market is going to perform from day to day, and trying to time the ups and downs of the market is generally a bad strategy. One approach is to use the time-tested investment strategy of dollar cost averaging. Basically, instead of investing money all at once, you can contribute a set amount to a 529 plan at regular intervals. Anyone who is investing a set amount on a regular basis, like monthly contributions to a 529 plan, is utilizing dollar cost averaging -- and helping to smooth out the swings -- so ultimately more shares are purchased when prices are low and fewer when prices are high.3

Myth 3 : I'll lose control over the assets in a 529 plan if my child decides not to attend college If a child or beneficiary chooses not to attend college, the parent or account owner is able to change the beneficiary to another eligible family member of the original beneficiary. As well, the account owner may choose to use the assets toward financing their own education. Furthermore, 529 plans give the account owner more control of the assets than custodial accounts, such as an UGMA/UTMA, where the beneficiary takes control of the assets once they turn 18 years old.

Myth 4: 529 plans offer limited investment options Many 529 plans offer a wide variety of investment options to choose from, which may include strategies, custom strategies, or static portfolio strategies. Additionally, once you select a strategy, you can often select from actively managed portfolios or index portfolios. While you're only allowed to reallocate previously invested contributions and earnings among portfolios once per calendar year for a given beneficiary, 529 plans allow the flexibility to change the investment allocation of future contributions at any time.4

Myth 5: I don't have enough money to open a 529 plan Even though requirements vary by plan, there are 529 plans that allow you to open an account with a minimum initial investment of $50 or even as low as $15 per month with an automatic investment plan.

Myth 6: I don't want to limit my child's college options by having to invest in my state-sponsored 529 plan All 529 plans are open to residents of any state and the account can be used to pay for qualified higher education expenses, including tuition, books, and room and board at most accredited two- and four-year colleges and universities nationwide and at eligible foreign institutions.

Myth 7: The contribution limits of 529 plans won't allow me to save enough for college Contribution limits for each beneficiary in many 529 plans are $300,000 or more, and while tuition rates continue to rise, parents who start to save early and regularly in a 529 plan may significantly increase their ability to meet future college costs. Considering the average cost of a private four-year college for the 2007-08 school year reached $32,307, an increase of 5.9% from the previous academic year5, the cost of waiting to save may force a college-bound student to rely more heavily on student loans or other means to supplement costs.

Myth 8: You can get a better return on your investments if you create your own portfolio of funds versus savings in a 529 plan While it is hard to predict future investment returns, there are several benefits to investing in a 529 plan account versus a general mutual fund account for instance, that may be earmarked for college savings. For example, investing in 529 plans can help prevent random withdrawals for day-to-day expenses or financial emergencies, such as home improvements, car repair, travel, or even retirement. As well, with a dedicated 529 plan account it is easy to establish a college savings goal up front and keep track of the progress against that goal, so that when the time comes to pay for college expenses, you know exactly how much you can cover and how much you may need to finance.
In addition, 529 plans are one of the best ways to save for future college costs because of their tax benefits. For example, 529 plans allow for earnings to grow tax-deferred and withdrawals from these accounts are permanently federal income tax-free for qualified higher education expenses, such as tuition, and room and board, as well as, books and supplies. Furthermore, because of their tax-advantaged status, 529s have greater potential to compound earnings when compared to taxable alternatives and therefore may leave you with more money for college. For instance, if a parent saves for college via such taxable alternatives as certificates of deposits (CDs), stocks, or a traditional bank savings account, the earnings of those investments may be taxed by as much as 30%.

How Fidelity can help Learn more about 529 plans.
(Please e-mail any comments to Investor's Weekly at

1. Trends in Student Aid 2007, College Board.
2. College Savings Indicator Research, Fidelity Investments, 2007.
3. Keep in mind that dollar cost averaging does not assure a profit or protect against a loss in declining markets. For the strategy to be effective, you must continue to purchase shares both in market ups and downs.
4. The IRS does not allow participants to have direct or indirect control over the investments in a 529 account.
5. Trends in College Pricing 2007, College Board.
Units of 529 Portfolios are municipal securities and subject to market volatility and fluctuation. Different asset allocations offer different balances between risk and potential returns. Generally, the greater the stock allocation, the greater the potential for long-term returns and the greater the risk of volatility, especially over the short term. Conversely, the greater the allocation to bonds and/or short-term investments, the lower the potential for high long-term returns but the lower the short-term risks.


Jeff Frese said...

529s are the way to go. Every parent should have one. I started a company that lets anybody in your circle of friends and family gift directly into your child's 529 plan. So instead of another Barbie Doll or shirt from the Gap people can gift into your child's plan. It's a simple site and concept that helps people save for college and give meaningful gifts. The site is

I also write a blog on saving for college the site is

Theresa said...

That’s a great post.

I would all plan to save for the future of your children, its worth cutting back on one luxury to provide for them isn’t it!

If you need info on saving plans in the UK visit jump savings.