"There are lots of odd ins and outs with 529s (for example, they're considered a completed gift outside the parent's estate but are part of the parent's assets on the FAFSA) ... but they're a great place for the college bucket," says Beloff.
To help reduce market risk, he suggests looking at target-date or aged-based options that shift assets to more conservative investments as kids get closer to college age. For example, New York's 529 College Savings Program Direct Plan, managed by Vanguard, shifts its moderate age-based option to a conservative growth mix (25% stocks, 75% bonds) when beneficiaries are age 11 to 15, and later replaces the stock portion with money market investments.
Beloff says three fee levels should be considered with 529 plans: the underlying mutual fund expense fee, the program fee (for rebalancing, asset mix selection and administration), and a commission fee for advisor-sold funds. With advisor-sold, advisors should review whether Class A shares or Class C shares are appropriate given the age of the beneficiary, he says.
If a client's state doesn't offer a tax deduction, there are really no reasons to stay in state, says Beloff. He does note that it's difficult to compare 529 plans across state lines since fund companies may break down age bands and conservative/moderate/aggressive investment mixes differently.
In addition, most states only offer single fund family platforms. Looking out of state? You may want to go with a fund family you like, he says. A more transparent 529 plan such as American Funds may appeal to clients interested in picking their asset allocation and specific funds rather than being assigned an age-based portfolio.
If a child is already well into high school, a parent really won't be able to leverage the tax savings 529 plans offer. "But if ultimately you need a forced-savings plan, a 529 plan may be good even late in the game if the fee structure is OK," says De Fontaine. At that point, it makes sense to use the least expensive fee structure, he says.
Some other college funding sources include zero-coupon bonds, Roth IRAs, Series EE savings bonds, cash value life insurance, UGMA/UGTA accounts, and Coverdell Education Savings Accounts (ESAs). "Pros and cons [for each] must be analyzed client by client," says De Fontaine. About a dozen states also offer 529 prepaid tuition plans that let parents lock in tuition costs at the state's public colleges and universities.
Beyond Savings
Understanding which schools have money and which ones don't is another important step to help reduce college costs, says De Fontaine. Information sources include The U.S. News & World Report Ultimate College Guide and the Collegeconfidential.com forums.
Finding what kind of money schools distribute to students is tougher, though De Fontaine suggests starting with the Ultimate College Guide. Some schools give just need-based aid; others may give more money to the top academic achievers, he says. A variety of sources provide freshman class academic credentials including Collegeboard.com, U.S. News and Princeton Review. Extracurricular activities can count a lot too. Research what schools are looking for a tuba player or whatever else a child may excel in, says Beloff.
Parents shouldn't be afraid to appeal to a college's financial aid office for more aid than what's offered, says Darvis, who's seen a number of success stories. The good thing about need-based and merit aid, in De Fontaine's experience, is that once students receive it it's often given for four years. "The myth is you get in and they pull the rug out, but I don't find that to be true," he says. For need-based aid, parents must show their financial picture every year.