College Savings Plans Outperform the Market

A comprehensive analysis of which 529 plans have done best, including some that earned profits.

Graduation day at Georgetown University.
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College savings and investments have weathered recent financial troubles better than most other investments, and some families have actually profited a bit with them, according to an analysis Morningstar performed for U.S. News.

While portfolios that are stock heavy, aggressive, or designed for very young children have suffered declines similar to the overall market's, the average 529 college savings portfolio has lost only about half as much as the market in general in the 12 months that ended September 30. The total stock market lost 21.25 percent in that period. Joe Hurley, founder of savingforcollege.com, says that "529 plans have held up very nicely" during the downturn.

Better yet, about two thirds of parents have invested in "age-based" portfolios, some of which have actually earned profits of about 3.5 percent during the past year, Morningstar found. Because the managers of these age-based portfolios automatically shift investments from riskier stocks to safer bonds as the child gets closer to college age, managers of funds designed for older kids were selling stocks earlier this year and locking those profits into safer alternatives like treasury bills. Hurley says he's grateful now that he put his own money in age-based portfolios for his two kids, both of whom are now in college. His accounts have actually grown in the past year, he notes. "The lesson is that age-based programs prove their value at times like this." (Of course, the downside of that approach may be felt next year, as managers start locking in the current losses.)

Parents who invested in prepaid tuition plans may have done even better. Those plans let parents buy tuition "shares" in certain schools. Since the cost of college has jumped about 35 percent in the past five years, parents who took advantage of those savings plans have protected themselves from inflation and market volatility. They've guaranteed their kids' tuition (as long as their students go to the schools that participate in the parents' plan). Although the plans can limit the students' choice of schools, the "prepaid plans are very attractive," Hurley adds.

Best of all, more parents are becoming eligible for free money for college. A growing number of states and employers are matching parents' college savings contributions, in much the same way employers match contributions to 401(k) retirement plans.

Click here for Morningstar's charts on the most recent performance of 529 plans or here for their analysis of age-based portfolios.