Before welcoming our first child into the world, my wife and I were worried about covering medical costs, budgeting a little one into our lives, and, yes, saving for college.
Like most new parents, we had no idea what we were doing.
Ultimately, we decided to open a 529 college savings plan, but choosing the plan itself took a lot more effort than we originally thought.
Ensure a 529 savings plan beats the alternatives
First of all, remember that there are plenty of ways to save for college without 529 plans. You might open a brokerage account, for example, because it allows for more control over investment elections.
And in terms of 529 plans, there are two different types you’ll need to choose from:
- Savings plans: This type of account places your post-tax contributions in an investment portfolio that grows tax-free until the beneficiary — aka your kid — is ready to enroll at any school, public or private. These so-called direct-sold plans are run by states, managed by financial services companies and include varying degrees of investment flexibility. Broker-sold plans might include more choice but generally carry higher fees.
- Prepaid tuition plans: This version involves a large lump-sum payment (or a series of them) to cover future tuition costs at today’s lower rates. If you live in one of a handful of states actively offering these plans, you can prepay tuition at a specific school or even target multiple public schools within your state. (A company called Private College 529 Plan provides the ability to prepay tuition for about 300 non-public universities nationwide.)
Unlike prepaid tuition plans, savings plans allow you to grow your investment over time. My daughter’s plan, for example, could gain 18 years’ worth of interest if she doesn’t touch the account until her freshman year of college.
Most states have at least one 529 plan offering, but you don’t have to just pick from what’s available where you live. You might think that complicates your choice, but it actually increases your freedom.
Imagine your ideal 529 savings plan
It’s always best to imagine what you want in a financial product before you start shopping around for it. This way, you know what you’re seeking.
For our daughter’s plan, my wife and I sought a few characteristics above all others, including:
- Income tax incentives for making contributions
- Proven track record of investment growth
- An easy-to-use website with responsive customer service
Of course, there are dozens of potential criteria for 529 plans. Here are some of the most important:
Best tax incentives
Savings plan contributions are made after taxes, but they could help you qualify for an income-tax deduction.
More than 30 states, plus Washington, D.C., offer tax credits, deductions or contributions to residents. And five states — Arizona, Kansas, Missouri, Montana and Pennsylvania — offer deductions even if you invest in another state’s plan, according to JP Morgan.
Of course, those deductions are especially worthwhile if you live in a high-income tax state. But if your state’s income taxes are low or it doesn’t offer attractive tax incentives, you might be better off prioritizing another state’s plan.
On the other hand, your state’s incentives could be too good to pass up. That might be the case if you’re a taxpayer in Indiana, which offers up to a $1,000 credit for $5,000 in contributions. Check out FinAid’s helpful chart to view your state’s offer.
If you have other bank accounts, you already know the first rule about fees — it’s best to avoid them. When you choose a 529 plan, it’s wise to minimize fees, or at least go in with your eyes open.
To see a plan’s fees, go to its website and view the “program description” or “disclosures.” Here, you’ll be able to view fees imposed by your state’s plan manager, plus costs for program management or account maintenance.
Say you’re comparing state-run plans from Nebraska and New York. Nebraska imposes an annual fee on your assets as high as 0.45%, more than three times that of New York’s (0.13%).
However, the fees won’t add up unless you begin investing larger amounts. You’d pay $4.40 in fees per $1,000 on Nebraska’s plan versus $1.30 for New York’s.
Best independent ratings
When all else fails, look to the experts. Saving for College and Morningstar have ratings systems and do a lot of the research for you. Savings for College, for example, tracks the 10-year performance of plans, if that’s among your criteria.
Don’t take anybody’s word for it, however. Review the methodology of any of these “best” lists to confirm that the features you care about are taken into account.
You might put less stock in a ranking, for example, if it heavily weights investment options. After all, you might be a newbie investor happy with a target-date fund set to mature when your little one heads to the big campus.
Choose the right 529 plan for you
In my family’s case, a handful of state-run 529 plans met our primary criteria. We dove a bit deeper to choose the best one for us. In the end, New York’s 529 College Savings Program Direct Plan came out on top.
Believe it or not, we chose New York’s plan, in part, because it featured UGift. That allows us to share a code for my daughter’s plan with family and friends who can make digital donations. It’s more efficient (and less awkward) than having to ask people to write out a check and snail-mail it.
Other factors, large or small, could sway you toward or away from one of your top-choice plans. You might be blocked from picking one, for example, if you don’t have the cash to meet its minimum required deposit. Some plans ask you to fork over $1,000 to open the account.
Getting started is the most important thing. Saving for college now could help you lessen your family’s reliance on federal or private student loans down the road.
But choosing the right savings vehicle, whether it’s your state’s 529 plan or not, is also paramount. It could give your child a leg up when they’re ready to step on campus.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.97%1||Undergrad & Graduate|
|2.47% – 6.99%3||Undergrad & Graduate|
|2.68% – 8.77%4||Undergrad & Graduate|
|3.24% – 6.66%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.01% – 9.75%6||Undergrad & Graduate|