Locking In College Tuition Rates vs. 529 Accounts

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Madeleine Brand discusses saving for college with Day to Day personal finance contributor Michelle Singletary. Singletary suggests saving with a so-called 529 account, and talks about the advantages of being able to "lock in" college tuition rates.

MADELEINE BRAND, host:

Every Tuesday we have financial advice from our personal money guru Michelle Singletary. Today she'll tackle a parental nightmare, saving for college. There are many ways to save, but earlier Michelle and I discussed so-called 529 accounts.

Michelle, what exactly is a 529 college-savings plan?

MICHELLE SINGLETARY reporting:

Well, really there's two 529 plans. There's prepaid tuition, where basically you lock into tuition prices today and your kid's going to be going, you know, years down the road. The second, more popular one is an investment option, much like how we invest in mutual funds. You put money in and they invest it in various stocks or bonds and so forth, and then the money that you put in grows tax-free. When it's withdrawn, it is not taxed as long as it's used for qualified educational expenses. And that's what makes it so popular because it has such a great tax advantage.

BRAND: And it's also pretty broad what qualifies as an educational expense, right?

SINGLETARY: Oh, yeah, tuition, room and board, anything that would--you know, your kid would actually need for college expenses.

BRAND: And do you have to invest in your own state's 529, or can you shop around and invest in other states' 529s?

SINGLETARY: No, you're free to go any--to any state plan. In some cases, if you invest in your state plan, you get a tax deduction. For example, you know, I invest in Maryland's plan because I get a $2,500 state tax deduction for each account. I've got three rug rats, so that's quite a bit of a savings. So you want to at least look into your state plan. It doesn't mean that that's where you should go because if there's not a lot of investment options or the fees are high, you may want to, in fact, go outside of your state. In fact, Morningstar rates Utah's plan highly. So you want to first look at your state plan but then look around. Look at the fees. But you can go anywhere in the country.

BRAND: Can anyone invest in the 529?

SINGLETARY: Absolutely, your mama, your daddy, your aunt. Anybody can open up an account for someone going to college. And that's what makes this really good. There's no income limitations. So it doesn't matter what kind of income you have; you can invest in these. But you've got to do your homework. Some of the plans are not very good and some of the fees are way too high. And as we know, fees, I mean, expenses eat right into your return.

BRAND: Well, let's say I'm in a plan that turns out to be not so good and I want to get into a better plan? Can I roll over the money I have in my plan into another one?

SINGLETARY: You do. You can move to another plan. You can't do it very often so you want to, you know, be careful when you do select. But you can move the funds if you're not happy in the state plan that you're participating in.

BRAND: And, Michelle, we were talking about the investment options, but you mentioned earlier that there's another 529 plan and that is giving people the ability to lock in college tuition rates at today's rates.

SINGLETARY: Yeah, that--it's a good option for people who are pretty sure their child is going to go to the state school. You get to lock in the tuition now--not all the costs though, that's room and board and other expenses are not included--but tuition and fees. So if you think your kid is going to go instate, then it could be a good option. If not, I would go with the savings part of it, the more popular 529 savings plan as opposed to the prepaid tuition plan.

BRAND: So you'd have to make sure your child went to that school.

SINGLETARY: Yeah, and how likely is that? My kid won't even wear the outfit I pick for her in the morning. But lots of folks have found if they are in states with really good state schools that they feel comfortable with locking in the tuition at today's rates. If you live in a state that has really good state schools, that might be the chance that you could take. It's not like you'd lose the money because they do give you the money, but in a more aggressive plan you could have earned more money.

BRAND: Michelle Singletary writes The Color of Money column for The Washington Post, and she joins us regularly for conversations about personal finance.

Thanks, Michelle.

SINGLETARY: You're welcome.

BRAND: And if you have personal finance questions for Michelle, just go to the contact page at npr.org and be sure to include `Michelle' in the subject line.

DAY TO DAY is a production of NPR News with contributions from slate.com. I'm Madeleine Brand.

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