529s in 2011: College Savings PlansHigh school graduation season is around the corner -- what better time to review your 529 college-savings plans? With the economy still in the doldrums and a couple of state bills under consideration that may change the way 529 accounts are treated, parents may want to take a closer look at how those college funds are doing.

529 plans offer parents a way to save money for tuition in tax-deferred accounts. And while a number of states offer tax benefits to all residents for participating in an in-state 529 college-savings plan, some cash-strapped states may become more restrictive about who qualifies for those tax breaks in the future, says Chris Stack, managing consultant for Savingforcollege.com.

Wealthy North Carolina residents participating in their state's Parental Savings Trust Fund, for example, have been enjoying a reduction in state income tax for the past five years. But come next year, the state's temporary waiver on income restrictions for those tax breaks is set to expire, unless the state legislature approves SB 247, which would permanently eliminate the income threshold.

"Right now, there is a zero limitation on income levels [for the North Carolina 529 plan]. You can make $1 million or make $1,000 and still claim the tax deduction," says Stack. "Since 529 plans have been around, there has been a universal trend to enhance [their] benefits. But now that we're in an environment where the states are fighting for limited resources and it'll be a true test for how policymakers treat these plans."

Taking away the bonus of a state income tax deduction on 529 contributions may slightly dampen enthusiasm for the plans. However, parents would still be able to reap the main benefit -- allowing their college savings to grow tax-free.

Rebounding from the Recession

When the recession began, the 529 college savings industry took a hit. In 2008, net contributions fell a whopping 63% to $5.1 billion, says Paul Curley, director of College Savings Research for Financial Research Corp. Since hitting that low, the 529 college-savings industry has begun a gradual recovery over the past two years, with net contributions reaching $9 billion last year and the industry reaching an estimated $138 billion.

"As time has passed, more and more money is coming in off the sidelines," Curley says.

529 college savings plans net contributions
And by 2015, annual net contributions are expected to reach an all-time high, adds Curley. He forecasts net contributions will reach $16 billion in 2015.

Curley sees a number of factors bringing 529 plans back into vogue, key among them being the expansion of product demand, innovations in marketing, and the development of new distribution systems that put college savings accounts on the radar of parents from a wider set of demographics and socioeconomic groups.

Consumers Growing More Comfortable With 529s

With more money under management, profits rebounding, and economies of scale kicking in, program management fees for 529 college-savings plans have been declining over the past two years, says Andrea Feirstein, managing director for AKF Consulting Group, a firm that advises 29 states on their 529 plans.

She estimates that program management fees have dropped by 50% to 60% on average over the last two years. Other costs associated with 529 plans include the underlying cost of the investment, administrative fees and the cost of a fee-based financial adviser if one is used.

Currently, there are about 90 529 college savings plans, of which roughly 59 are offered directly to consumers by states and educational institutions. The remaining funds are purchased through financial advisers. And although most funds are available directly to the public, the majority of accounts handled in the $138 billion industry -- approximately 55% to 60% -- are opened with the help of advisers, notes Feirstein, That figure, however, has dropped from roughly 80% about a year ago as consumers have become more comfortable selecting their own 529 college savings plans, she added.

Financial advisers, meanwhile, are increasingly using a multi-managed funds approach for 529s. That allows participants to sign up for a single 529 plan, yet gain diversification because several different fund companies are used for the plan.

Some of the flexibility in 529 plans is also cropping up with an increasing selection of FDIC-insured plans, Feirstein says. The option provides consumers with a more conservative approach to their 529 college savings plan.

Consumers used to having flexibility in their 401(k)s are seeking similar flexibility in their college savings plans. Stack says a movement is afoot in Congress to give all consumers the right to switch from one fund -- say, a bond fund -- in their 529 plan to a stock fund within the same plan.

"It's more of a question of when, not if, this type of legislation will pass," says Stack.

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May 29 2011 at 12:05 AM Report abuse rate up rate down Reply

Obama calls what he wants for America his "Kenya Model" of economics where no one owns a car and you have to walk to the local market to sell the vegetables that you grew in your garden in order to buy more food…perfect for us. If you have a job in Kenya you get a small paycheck for travel expenses but the bulk of your earnings are given to the government. Of course, there is a huge welfare system but the life expectancy is only about 48 years old. The upside a large safety net, the down side you'll live in poverty all of the rest of your life. Incidentally, the TEA Party gets their name from Taxed Enough Already. I am…are you? Do you believe solar energy and windpower in the future are going to help your gas prices now? If you do then you are as clueless as our President.

April 27 2011 at 10:57 AM Report abuse +4 rate up rate down Reply
1 reply to eclasseclass's comment

Who takes charge of the fund to them? they abuse right.

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April 27 2011 at 10:35 PM Report abuse rate up rate down Reply

Again, let's punish those who are trying to save for their children's education. It is insane to think that "weathly" indviduals are not suffering under these horrible economic times and do not deserve any "breaks".

April 27 2011 at 10:14 AM Report abuse +2 rate up rate down Reply

Why do you say "wealthy" North Carolina residents contribute to these plans? More stocking the fires of class warfare! These plans call as little as $100 to start. That's a month of all important cell phone use. What's more important? College or your cell phone or cable for that matter. Oh, I know; the tax payer has to pay for your kids college.

April 27 2011 at 9:52 AM Report abuse +2 rate up rate down Reply
1 reply to aniconn's comment

Aniconn, Abe Lincoln must be turning in his grave and here are his words.
You cannot bring about prosperity by discouraging thrift. You cannot strenthen the weak by weakining the strong. You cannot help the wage earner by pulling down the wage payer. You cannot further the brotherhood of man by ENCOURAGING CLASS HATRED. You cannot help the poor by destroying the rich. You cannot keep out of trouble by spending more than you earn. You cannot build character and courage by taking away man's initiative and independance. You cannot help men permanantly by doing for them what they could and should do for themselves.

April 27 2011 at 10:32 AM Report abuse rate up rate down Reply

Colliage, wo neads colliedge when high schoel dos such a fine jib?

April 27 2011 at 9:52 AM Report abuse +3 rate up rate down Reply

At $4 a gallon, who can save????

April 27 2011 at 9:36 AM Report abuse +5 rate up rate down Reply

just become ilegal and the goverment will fund your collage

April 27 2011 at 9:34 AM Report abuse +5 rate up rate down Reply


April 27 2011 at 8:02 AM Report abuse -1 rate up rate down Reply