Are 529s the best way to feed your college fund?
Are 529s the best way to feed your college fund? iStockphoto.com
If you're already invested in a 529 or just curious about what's out there, Morningstar has rated the best and worst 529 plans, and lets you compare how your plan stacks up.
This is the season when students graduate from high school and their parents worry about how to pay for college.
Many hope to benefit from a tax-free fund designed for college savings called a 529 plan. Over the past couple of decades, Americans have put about $80 billion into these funds. But Greg Brown, who works for the independent investment research firm Morningstar, argues 529s have serious flaws.
"The problem with 529s is that they add a layer of complexity and confusion that really ... doesn't need to be there," Brown tells NPR's Steve Inskeep.
Every state has at least one 529 plan available — and sometimes parents have to choose between four and five different options, Brown says. Having states involved also adds more costs, he says.
"You've got the underlying fund fees and then you've got additional costs that the state is adding ... to handle recordkeeping and other sorts of things," he says.
Brown says saving with a 529 plan isn't necessarily a bad idea. "As it stands today, for parents that want to save a significant amount of money for college, 529s are the best way to save for college," he says.
But he says better options could be out there. For example, he says, the Coverdell Education Savings Account, like a Roth IRA, allows you to choose where to put your money, giving you more control over your accounts — plus, there's no state involvement.
"If Coverdells were given more support," Brown says, "then mutual fund companies would create these college-age-based options."
Those funds put less money in riskier investments as a student gets closer to college-age — and that's key, Brown says.