Are These Myths Preventing You from Saving for Children’s Higher Education?

We started to save for our daughter’s future education shortly after they were born (for our second daughter, we did wait nearly four months before opening a 529 plan for her ) and since then we have been making monthly contributions to their 529 accounts, currently5. Th at $14,77e reason for deciding to help our children is quite simple: We want them to go to the schools at their choices when the time comes without having to worry about how to pay for it themselves. I was lucky enough to finish my college tuition-free, but my parents did support me with all other expenses. Now, I want to do the same for our children. Somehow I feel it’s an obligation. With annual college inflation running twice as much as the general inflation, the cost of college education could become a heavy burden to them after their graduation if our children have to pay for their own education.

Though participation rate in 529 plan has increased exponentially in recent years, according to Investment Company Institute, not every parent has taken the full advantage of the vehicle to save for college because of misunderstandings of the plan. Last week, I received an email from Fidelity which points me to an article on college-saving myths, which clarifies some common misconceptions of 529 plans. The following are the excerpt of the article.

Myth 1: Saving in a 529 plan will affect my child’s eligibility to receive financial aid
Truth: Assets in a 529 plan are owned by parents, not the child. Though the assets are only assessed at 5% when determining federal financial aid, as opposed to 20% for child-owned assets.

Myth 2: I shouldn’t risk investing my money in a college savings account when the market is so volatile
Truth: Trying to time market is never a good idea to invest in stocks. Instead, making contributions regularly (dollar cost averaging) help to smooth the ups and downs in the short-term.

Myth 3 : I’ll lose control over the assets in a 529 plan if my child decides not to attend college
Truth: Parents can eaisly change beneficiary if the child doesn’t want to go to college. In the worst case scenario, the money in a 529 plan can be withdrawn for purposes other than higher eduction at a 10% penalty.

Myth 4: 529 plans offer limited investment options
Truth: Though 529 plans don’t have the flexibility to offer all the investment options available, many plans do provide a wide selection of investments such as bonds, index funds and age-based portfolios at low costs.

Myth 5: I don’t have enough money to open a 529 plan
Truth: There are many 529 plans require a minimum initial investment as low as $50 and monthly contribution of $15 with an automatic investment plan. You don’t have to have a lot of money open a 529 account.
Myth 6: I don’t want to limit my child’s college options by having to invest in my state-sponsored 529 plan
Truth: Anybody can invest in any 529 plan, not just those sponsored by the resident’s own state, though some plans do offer extra tax incentives to the state’s residents.

Myth 7: The contribution limits of 529 plans won’t allow me to save enough for college
Truth: Unlike IRA accounts ($5,000 limit for 2008) and 401(k) accounts ($15,500 limit for 2008), annual contribution limits of many 529 plans can be as high as $300,000.

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
Truth: Because of the 10% penalty, a dedicated college savings plan can prevent parents from withdrawing money from the account for day-to-day spendings that are not related to higher education.

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Morningstar’s Best and Worst 529 College Savings Plans

Really, I almost got a heart attack when I saw Ohio CollegeAdvantage is among the worst college savings plans published by Morningstar yesterday because that’s the one I opened for our younger daughter last year. Fortunately, what I have isn’t exactly what’s named in the Morningstar list.

Anyway, Morningstar yesterday published its annual ranking of the best and worst college savings plans. Five plans are chosen as the best 529 plans because of their superiorities in fees, investment diversification, plan flexibility and fund choices compared to their peers.

• llinois Bright Start College Savings Program (OppenheimerFunds): This plan charges 0.20% to 0.23% for index portfolios and 0.38% to 0.63% for actively managed portfolios and there’s a $10 annual fee for each index portfolio. It requires only $25 to start the plan and $15 minimum in subsequent investments. The plan is managed by OppenheimerFunds and Vanguard.
• Maryland College Investment Plan (T. Rowe Price): This plan is also one of the best in last year’s ranking. It charges $25 account fee annually plus 0.28% program fee. The underlying funds’ expense ratio range from 0.40% to 0.69%. The minimum initial investment is also $25. For Maryland residents, up to $2,500 contribution can be deducted from state taxable income.
• Virginia CollegeAmerica (American Funds): Another winner in the 2007 ranking, Virginia CollegeAmerica plan is a broker-sold college savings plan which offers 22 American funds. The plan charges $10 for opening an account as well as $10 annual account fee. The expense ratio of this plan ranges from 65% to 1.10%. Virginia residents who participate in this plan can deduct up to $2,000 ($4,000 beginning 2009) from state income.
• Virginia Education Savings Trust (Virginia): VEST plan give investors a large selection of index funds and actively managed funds in age-based portfolios. Plan managers include Vanguard, Templeton, and American Funds. The plan charge $25 when an account is opened plus $10 annual fee. Expenses of underlying funds are between 0.06% and 0.32%. $2,000 contribution to the plan can be deducted annually for Virginia residents.
• Colorado Scholars Choice College Savings Program (Legg Mason): This is another broker-sold plan. The plan doesn’t charge fee for opening an account, but there’s an annual maintenance fee of $20 for assets below $2,500. In addition to the funds’ expenses, the plan also adopts a portfolio-based fee structure, making more complicated than other plans. Contributions are tax deductible for Colorado residents only.

There are also five plans named by Morningstar as the worst:

• Ohio Putnam CollegeAdvantage (Putnam Investment Management)
• Mississippi Affordable College Savings Program (TIAA-CREF)
• Mississippi Affordable College Savings Program (TIAA-CREF)
• New York 529 College Savings Program (Upromise)
• Nebraska AIM College Savings Plan (Union Bank (AIM))

The main reasons for those plans being put on the worst list are: 1) high costs; 2) lack of diversification; and 3) quick management changes, which are bad for long-term investments such as saving for college. I am using Ohio CollegeAdvantage, but, fortunately, it’s not the Putnam broker-sold plan. For me, when the most important element to consider when choosing a 529 plan is costs, which include both the administrative fees and funds’ expenses, followed by investment choices. State income deduction isn’t really an issue as I didn’t want to be restricted to the state’s plan for the tax incentive. I’d rather choose a plan that’s available nationally with low costs and solid performance.

Which plan are you using?

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Setting Up Another 529 Plan

Our second daughter is more than 4 months old now, yet I waited till yesterday to set up an 529 plan account for her. I wasn’t really waiting for anything. It has been on my mind since she was born, but I kept delaying it with no good excuses. If I didn’t read Lazy Man’s post on 529 plan over the weekend, the delay could be even longer. When our first daughter was born in 2005, I opened an account for her within the first month though.

The 529 plan I got for our first daughter was the UPromise College Fund which is tied to my Citi UPromise credit card. Though the fund is also managed Vanguard, its expense ratio (ER) is rather high (0.65% for aggressive growth portfolio) and it charges $20 annual account maintenance fee. For this plan, what I like is, through UPromise, it automatically invests rewards earned form the credit card in the fund. The $20 fee, however, is really annoying. So this time I want to get a different plan for our second daughter. And since New Jersey doesn’t offer any tax incentives for using the in-state plan, I am free to choose any plan I want, based mainly on the plan’s expenses and manager.

There were a couple of plans that I identified last year when researching for college savings plans for our first daughter, namely College Savings Iowa 529 Plan and Utah Educational Savings Plan. However, the Iowa plan charges 0.62% ER plus a $25 account maintenance fee, while the Utah plan has a lower ER (0.25% to 0.39%) , it also requires $25 annual fee that I want to avoid. Eventually, I followed Lazy Man’s suit and decided to go with Ohio CollegeAdvantage 529 Savings Plan for its lower fees (0.32% to 0.37% ER, no annual account maintenance fee). The Ohio plan is also managed by Vanguard.

The account opening process was quite simple, taking about 10 minutes to complete:

1. Account owner’s information, including name, DOB, SSN, driver license, and mailing address;
2. Email address and account user name and password;
3. Verification of email address;
4. Beneficiary information, including name, DOB and SSN;
5. Initial contribution selection, including amount, investment choice, and bank information;
6. Automatic contribution plan set up;
7. Successor owner information, in case, you know…

I made an initial investment of $1,200 just to make up the four months I missed and set up an automatic monthly contribution of $300, the same amount as we set aside each month for her sister. If the market can return an average between 8 to 10%, by the time they reach college age, they should each have between $14,000 and $180,000 in their college savings account if we can maintain the monthly contribution for the next 18 years. My parents supported my college education. So I feel I have the obligation to support my children as well, as long as I have the ability to do so. If they can find a job to pay part of the tuition, that’s great; if not, I want to be able to pay for the school at their choices, though $180,000 may not be enough at that time. This support, however, doesn’t come at the expenses of our own retirement savings. We both contribute close to the limit to our 401(k)s and maxed out our Roth IRA accounts every year.

The investment choice I made was Vanguard Aggressive Growth Index Portfolio, which has 85% in Vanguard Total Stock Market Index Fund and 15% in Vanguard Institutional Developed Market Index Fund. They also have aged-based aggressive portfolio, however the allocation shifts from 100% stocks to 65% equities 35% bonds when the age reaches only 6. That’s a little too fast in becoming conservative. With a 100% in equities allocation, I hope the money can grow a little faster. When our daughters get close to college age, I will do the adjustment myself to preserve the money.

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Shop and Save for College: UPromise vs. BabyMint

I have joined both UPromise and BabyMint and have accumulated more than $400 of rebates with UPromise since 2004 when I actually started to use my Citi UPromise card regularly though I had the card and joined the program in 2002. I didn’t use BabyMint a lot, not because UPromise is better (well, in some areas, yes), but I started with UPromise much earlier than with BabyMint. Generally, I feel that both programs can provide some extra help when it comes to saving for college, and when started early and used wisely (especially the investing part), the savings can make a big difference 18 years later when my children go to colleges.

The followings are my experience with these two shop and save for college programs.

How they work

Both programs are free to join and work in almost identical way: join the program online (join BabyMint or UPromise [Affiliate link]), earn cashbacks by either shopping at their respective network merchants or in store using their respective credit cards, save and invest the rewards for future college education.

How to earn rebates

Both UPromise and BabyMint have their own network of merchants and, if you browse through them, you will find companies are likely to be in both networks. So if there’s no difference between network member merchants, how about the rebates one can earn to shop through them. That will depend on what you are looking for. Since I do most of my electronic shopping online, here are some the rebates offered by UPromise and BabyMint for some sites I used most often:

• CircuitCity: UPromise - 3%*; BabyMint - 1.5%
• CompUSA: UPromise - 1%; BabyMint - 2%
• Staples: UPromise - 4%*; BabyMint - 2.5%
• Buy.com: UPromise - 1%; BabyMint - 1%
• BestBuy: UPromise - 2%; BabyMint - 1%

From my experience, BabyMint offers slightly higher rebates, but UPromise has a wider selection and, from time to time, it runs promotions with extra rebates (they are currently offering extra 2%* rebates through March 31, 2007).

The two programs also offer their own credit cards for members to shop in-store and earn cashbacks. However, the BabyMint College Savings Credit Card, issued by MBNA, appears to be terminated as I am not able to find any active link to the card. On the other hand, the UPromise MasterCard from Citi is still available, which basically gives 1% back for every eligible purchase and 2% cashback for filling up your car at Exxon Mobil station. In addition, there are additional 10% savings when you buy items with “UPromise” sign at grocery and drug stores.

How cashbacks are credited

The cashback you earned either by shopping online or off-line through these programs won’t be available immediately. In fact, there are some lengthy delays before you notice the credits on your statement and that delay could be as long as two months. For example, I made a purchase on July 28, 2006 at Buy.com through BabyMint and the cashback was credited to my account on September 22, 2006. At UPromise, rebates for a transaction on January 31, 2007 was posted on March 6, 2007. However, at UPromise, a transaction made through the network shows up immediately with a “pending” status.

How to save for college tuition

What I like the most about these programs is that the cashback I earned can be automatically invested in a college savings account that’s linked to my UPromise or BabyMint account.

Every quarter, the cashback in the UPromise account can be transferred to either a UPromise College Fund managed by Vanguard or a state-sponsored 529 plan (Arkansas, New York, Iowa, Missouri, North Carolina, North Dakota, Pennsylvania, and Colorado). Similarly, rebates of $25 or more in a BabyMint account can be invested in any 529 plan or a Coverdell educational savings account linked to the account on a monthly basis. As you can see, BabyMint offers more investment choices (any 529 plan) with more flexible schedule (monthly). BabyMint, together with SAGE Scholars, also has a Tuition Rewards program that allows members to double their savings by redeeming the cashbacks as tuition credits at over 175 colleges and universities

In addition, cashbacks can also be used to pay off outstanding student loans.

How to save more

BabyMint has a referral programs that let members to save more by spreading the word. At BabyMint, every referral will receive 5 BabyMint Bucks when joining and after they accumulate at least $25 in their BabyMint account, you will receive 5 BabyMint Bucks as well. At UPromise, members can invite friends and family to join the program and allocate a portion of their cashbacks to your children’s savings account.

While both BabyMint and UPromise offer rebates when shopping through their member merchants, we should always look for the best price instead of having how much rebates we can earn as the first priority. After all, we don’t want to shop just for the sake of getting the cashbacks. Also, saving and investing for future college is a long-term project, and as any long-term investment plan, we should look beyond the returns to find the right plan. Other factors, mainly fees, are also critical in selecting a 529 plan (check out Morningstar’s best and worst 529 plans). It’s nice and convenient that BabyMint and UPromise allow us to transfer cashbacks to a linked college savings account, but that shouldn’t be the only criterion.

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Moringstar: The Best and Worst 529 College Savings Plans

Early last week, Morningstar released its annual evaluation of 529 college savings plans. According to Morningstar, qualities of 529 plans continued to improve in the past couple of years as plan providers reduced fees (both Fidelity and Vanguard have lowered fees of their college savings products) and eliminated high-price offerings. Good news for parents who use 529 plans to fund their children’s future education also came from the Congress as the federal tax breaks for 529 plans, which were originally set to expire in 2010, have been made permanent by the Pension Protection Act of 2006. The change of the tax law removed one major hurdle which has been seen in the past as preventing the plan from becoming more popular. In fact, according to Investment Company Institute, the growth of 529 plans has picked up speed in recent years and the new tax law will only fuel the momentum.

While giving with state-sponsored 529 plans which offer tax-incentives remains the first choice for parents, Morningstar cautions that the incentives “don’t necessarily overcome the disadvantages of a poor or costly plan.” In reviewing more than 80 college savings plans offered in 48 states and the District of Columbia, Morningstar put a great deal of emphasis on such critical aspects as plan costs, diversification, and asset allocation (which also happen to be the core of building a sound personal investment portfolio). The top five 529 college savings plans are:

Among them the Colorado plan and Virgina plan are sold through financial advisors or brokers (therefore, the front-end load), while the other three are direct-sold plans. One of the main features of these plans is that they all have relatively low costs.

At the other end of the spectrum, the report also named 6 worst 529 plans:

and, as compared to the best plans, they all have higher fees and ERs. Also, as noted by Morningstar, these plans don’t offer an appealing line of products.

* $20 maintenance fee is waived for Colorado and Wyoming residents and for more than $2,500 account balance.
** $25 maintenance fee is waived for direct payroll contributions, or a balance of $25,00o.

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Changes to Fidelity UNIQUE College Investing Plan

Before I applied for the then Fidelity 529 College Rewards MasterCard (now Fidelity 529 College Rewards American Express Card) back in March, I opened a 529 plan with Fidelity in order to invest the 2% rewards I could earn from the card. The plan I chose was Fidelity UNIQUE 2024 plan (which is also Fidelity’s nationally available plan), sponsored by the State of New Hampshire. In addition to the rewards earned from the credit card, I also put $100 every month into the account. The fund has annual expense ratio of 0.50% and one year return of 9.09% (click here for performance details).

Today, I received a letter from Fidelity about some changes to the plan:

• The annual account maintenance fee of $20 has been eliminated;
• Account minimums have been lowered from $1,000 to $50 - or $15 a month with automatic investment;

The elimination of the account maintenance is definitely a welcome change as the $20 is about 1.67% of the total annual contribution. I have another 529 plan with Vanguard which is linked to my Citi Upromise Credit Card. That account, however, continues to charge $20 maintenance fee, though it has a one-year return of 15.94% (I chose Vanguard Aggressive Growth Portfolio for my daughter’s 529). According to a BusinessWeek online article in May, “Vanguard and Upromise charge a premium.”

In 529s where Vanguard teams up with rebate-outfit Upromise to provide administrative services - or where Upromise runs the plan alone - account holders may be paying up to twice as much in fees as their counterparts in other plans with Vanguard funds.

The plan itself has another 0.65% annual plan fees, higher than what Fidelity charged for its 529 plans, though the rebates from Upromise can offset the fees a little bit.

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