college

529 savings plans

Who can benefit?

Some financial advisers urge lower-income families, who are likely to receive a large amount of financial aid, to pass on 529 plans. If you're likely to qualify for financial aid, the existence of a 529 savings plan may reduce or eliminate the amount of aid you can receive. That's because for financial-aid purposes, savings plans are considered an asset of the account owner.

If the parents hold the plan, the amount of financial aid the student may be eligible for will be reduced by up to 5.6 percent of the savings account. A family with $40,000 in a 529 savings plan, for example, would see their financial aid decrease by as much as $2,240.

College savings plans may make the most sense for upper-income families who won't qualify for financial aid and for middle-income families who qualify for loans and little else.

Risks

While a state-sponsored plan has benefits, the costs may be higher than you think. Invest in a high-priced plan and you'll lose a nice chunk of earnings to hefty management expenses and other fees.

Let's say your family contributes $600 a year to a college savings plan with a $50 annual maintenance fee. And let's suppose an 8 percent return. By year's end the account balance would swell to $648. But that $50 maintenance fee would knock it back down to $598. So after a year of investing, you've got $2 less than when you started.

A key advantage of a 529 plan -- tax-free earnings -- matters little if fees eat up all or most of your earnings.

The good news is many college savings plans will waive annual maintenance fees to in-state residents, people who make automatic contributions and people with large account balances, often $25,000 or more.

The bad news? There are plenty of other fees to worry about. Several college savings plans charge you a one-time enrollment fees right from the get-go. These fees range from $10 to $90, and most are under $50.

Asset-based management fees

The most troublesome fees for families stretching to save for college are fees that are charged every year, such as an asset-based management fee. This fee represents the operating expenses of the college savings plan and is charged as a percentage of the plan's assets each year.

A 1 percent, asset-based management fee means that a fee equal to 1 percent of the plan's assets gets deducted each year. A 5 percent asset-based management fee means a fee equal to 5 percent of the plan's assets gets deducted each year.

The higher the asset-based management fee, the more earnings get swiped out of your account every year.

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