Michael Fox made an unusual decision when he elected to open a college investment account for his 6-year-old niece Daniella, then just a month old. The Washington, D.C., resident bypassed the district's 529 plan, as these accounts are known, which offered him tax benefits.
He figured that choosing a plan with high flexibility and low costs was more important to 18 years of growth than tax incentives. Fox, who is a certified public accountant and financial planner, instead opted for a 529 plan option within the Utah Educational Savings Plan that allows members to choose among the investment options for themselves, while still adjusting the risk level as kids age.
Fox was worried about what would happen to investments in longer-termed bond funds – mutual funds containing bonds – if interest rates changed.
[Make sure college savings are keeping up with your goals.]
He used the new option to pick bond funds containing one- or two-year bonds. That allowed him to sell those and buy into a bond fund with longer-term bonds if interest rates rose – which could earn higher interest rates.
Families' choices within 529 plans are increasing. New or unusual plan options can help parents afford to send their child to their dream school, invest based on their social conscience or gain control without high investment costs.
The California's ScholarShare College Savings Plan offers an option to appeal to families with a social conscience. Families who choose this option invest in a fund that contains companies chosen for "excellent records in corporate citizenship, product safety, environmental performance, human rights, business ethics and other social policies," says Bill Ainsworth, spokesman for California State Treasurer Bill Lockyer. Lockyer is the chairman of the ScholarShare Investment Board.
Another unusual option exists for Pennsylvania families aiming for an elite college education for their children. The state's Guaranteed Savings Plan offers an option that locks in future Ivy League tuition at today's prices.
[Learn the do's and don'ts of using a prepaid tuition plan.]
In a prepaid tuition plan, a special kind of 529 plan, families typically buy tuition credits for a certain number of years or semesters ahead of time. For the Ivy League option, parents buy tuition credits at the current average tuition rate of the eight Ivy League schools, regardless of how many years it will be until the child is college age. Parents could buy just one credit or enough to cover their child's full education, says Kathleen F. McGrath, director of the Pennsylvania 529 College Savings Program.
Tuition is redeemable at the average rate among the Ivy League schools. If tuition at the school the student attends is lower than the average, the family can use the remaining amount for textbooks or room and board. If tuition is higher than average, the family has to pay the difference.
If the student gets a scholarship and doesn't need the money for tuition, the money can also apply to room and board or any other qualified higher education expense. If the student ultimately does not attend Harvard University, for example, then the tuition credits can be converted to tuition for Pennsylvania state schools. The plan would work as if the family had saved for the child to go to a state school the whole time.
For those more comfortable investing, or whose financial advisor will oversee the account, the Utah Educational Savings Plan offers several plans with low fees that still allow parents and advisors to have some control over investments. The accounts' relatively low fees and customized investment options attract advisors interested in choosing the plan for their clients, says Diane Johnson, a spokeswoman for the Utah Educational Savings Plan.
[Find out how 529 plans are priced.]
One popular option is the age-based 529 plan Fox chose. He had to choose what percentages of the money he wanted to invest in categories, including stock-based investments and less risky investments such as savings accounts and bonds, for different ages. However, within each specific area he can adjust investments that match the qualifications for that part of his account.