Nickel and Diming Your Kids to College

Fees. Competition among financial services firms is driving down 529 plan fees and expenses, often as state plans are put up for rebid to firms that manage them. Take Fidelity. Last year, the mutual fund giant won the contract for California's direct-sold 529, which used to be managed by TIAA-CREF (a separate California 529 plan is sold through brokers). Fidelity agreed to expand the plan's investment options and to include a low-cost index-fund option that charges just 0.5 percent in annual management fees, less than previously offered funds.

While a difference in annual fees of 0.5 percent and, say, 1 percent may sound slight, it can mount up. Say you invest $20,000 in similar investments in two different 529 plans. And let's say both earn 8 percent a year gross. But Plan A charges 1 percent in total annual management fees, leaving you with a net return of 7 percent a year. And Plan B charges just 0.5 percent, for a net gain of 7.5 percent. Over an 18-year stretch, you would earn $5,900 more in Plan B.

Investment choices. More plans are now offering families a choice of investing in actively managed funds or low-cost index funds, which simply invest in all the stocks or bonds in a market index. And banking products like certificates of deposit have moved into 529s. Plans in Arizona, Hawaii, Montana, and Ohio all offer parents the choice of investing college savings dollars in CDs, which will appeal to parents looking to protect savings from market losses as their kids near college age.

Tax deductions. While more than 30 states offer their residents a state tax break for investing in a 529, most make these breaks available only to parents who choose the in-state plan. But now a few states, including Kansas, Maine, and Pennsylvania, are offering state tax deductions to residents who put money in any 529 plan. It's too soon to tell if this is the start of a real trend, but similar tax parity legislation has been introduced in nearly a dozen other states.

Rebates. Whatever the states do, parents can help themselves by using rebate programs tied to 529s. They include Upromise, BabyMint, and Little Grad. Each site offers rebates every time you shop at a partner merchant, and those savings can eventually be deposited into a college savings account.

Of course, families may save more by shopping for lower-priced merchandise instead of hunting for a rebate tied to name-brand goods. And some basic credit cards offer customers a 2 percent rebate on many purchases.

But Lisa Roll, a Upromise member who works as a financial adviser, wonders what the odds are that you'll take every last penny of savings through a basic rebate credit card and deposit it into a 529 for your child. "This way, at least, you can kind of put everything on autopilot," Roll says. And getting college finances on autopilot is certainly a small way that parents can achieve surprisingly big savings in their 529s.