Parents may be happy to know that administrative fees for 529 plans are shrinking.

Answers to 3 Common Questions About 529 Plan Prices

Administrative fees and the overall costs of college savings accounts are on the decline.

Parents may be happy to know that administrative fees for 529 plans are shrinking.

Parents may be happy to know that administrative fees for 529 plans are shrinking.

By SHARE

There is good news for parents who are investing in 529 education savings accounts: declining fees. These accounts, also known as 529 plans, offer investment options for saving for college and post high school training programs and have the potential for federal and state tax benefits. The overall benefits of investing in a 529 plan are greater as fees shrink, industry experts say.

Regardless of their state of origin, 529 plans generally charge program management fees—additional costs that are usually fees charged by the state or independent organization that manages the 529 plan and provides customer service, advertising, and administration. There isn't a mandate on what a management fee includes, says Morningstar Mutual Fund Analyst Kailin Liu, which is why she recommends comparing 529 plans by a combined price called an expense ratio. Parents may also hear the expense ratio referred to as the 529 plan's price.

[Take these steps before opening a 529 plan.]

The expense ratio drop directly translates into more money that families can apply toward college savings, says Jeff Howkins, president of Sallie Mae's Upromise Investments, Inc.

Here are answers to three commonly asked questions about 529 plan prices:

1. Why are prices dropping?

Since parents can choose among plans from across the country, states watch what other states are charging. "When one state lowers fees," says Morningstar's "2012 529 College Savings Plans Research Paper and Industry Survey" author Laura Lutton, "we tend to see a domino effect. States can say to program managers, 'It's time to sharpen your pencil if you want to keep your contract.'"

Fees are also dropping because more funds are including indexed investments, Lutton says. Indexed investments, such as the those tied to the Standard & Poor's 500, require less time to manage because the investments are packaged based on a financial index. Thus, managers have fewer choices to make.

[Get more tips on paying for college.]

2. How much are prices dropping?

According to Morningstar's Liu, fees have dropped significantly since 2006. One plan that had a price of 0.6 percent then charges 0.2 percent now. The difference, assuming investing for 11 years, starting with $5,000, and depositing $100 per month, is about $500 less in fees charged. And fees are continuing to drop; for instance, based on Morningstar data, two of New York State's plans for the 7- to 12-year-old age bracket dropped their price by nearly a third between 2011 and 2012.

[Learn how to choose an age-based 529 plan.]

3. How should prices impact 529 purchases?

Parents need to consider 529 plans in some of the same ways they'd consider buying a car, some experts say. The price can be right, but do they trust the car manufacturer, is there a good safety record, and will they have a comfortable driving experience? Morningstar's Lutton says while fees have a "big sway in [plan] ratings," parents should also consider tax benefits, investment quality, and investment manager experience.

She notes that there are plans, such as the T. Rowe Price College Savings Plan and the Maryland College Investment Plan, where the fees are higher but the plans produce consistent earnings. The bottom line, Lutton says, is when it comes to considering price—as in any plan with higher fees—either the tax benefits or additional earnings from investments must be high enough to overcome the plan price.

Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.

Corrected on : Corrected 7/24/12: An earlier version of this article misspelled Kailin Liu’s name.