Despite market losses, it's worth staying in a 529 college savings plan - but be smart
If you are saving for college in a 529 plan, you probably took a bigger hit than you expected during the 2008 market crash.
What now? Keep the plan or dump it?
My opinion: Stay in the 529 world, but in a smarter way. These plans, run by the states, can be a great tax-saving way to put aside money for college. You invest with after-tax dollars, but the earnings are tax-free if they are used to pay for higher education.
Thirty-four states and the District of Columbia encourage contributions by giving you credits or deductions on your state tax return. You can buy a 529 from the state, at a low cost. Or buy at a high cost from stockbrokers and financial planners.
[Massachusetts’ 529 college savings plan is called the U. Fund.]
Smart idea number one: Buy through the state. When you open a 529, you have a wide variety of investment choices. The most popular are age-based. They buy stocks while a child is young and promise to grow more conservative in the years just before college entry. Good age-based funds keep their promise. You have plenty of cash on hand when the tuition comes due.
Irresponsible age-based funds gamble on earning higher returns. They continue to hold a large proportion of stocks and risky bonds, even for 19- and 20-year-olds. These are the funds that get parents into trouble. If you are paying tuition this year, 20 percent or more of your college money might be gone.
One 529 expert, Joseph Hurley of Pittsford, N.Y., recently surveyed 529 portfolios for children 17 and older. Every one of the pricey plans sold by brokers and financial planners showed losses of more than 10 percent for this age group in 2008.
The record is better - although far from perfect - for the plans sold by the states. Twenty-two percent of them suffered more than 10 percent losses, but 12 percent showed gains. For the full tally, see www.savingforcollege.com.
In the two years right before college, a good age-based 529 plan should be invested largely in shorter-term bond funds, money-market funds, and insured certificates of deposit.
Jackie Williams, executive director of Ohio’s plan, says a 529 needs aggressive and conservative options. Aggressive plans are often sought by parents who started saving late and hope to catch up. That’s a short-sighted strategy. The stock market doesn’t decide to reward you just because you need money fast.
Besides, people who buy age-based 529s aren’t expecting high-risk investments near the child’s enrollment date. States that let that happen are wronging the parents who trusted them with their money. North Carolina will soon get rid of its high-cost, badly performing plans.
Smart idea number two: You should do the same. Buy your state’s direct-sold funds and choose a plan that’s mostly in bonds and cash when the child turns 17.
Jane Bryant Quinn is a Bloomberg News columnist. She can be reached at jbquinn@bloomberg.net. 
