The economy has affected our savings, retirement plans and home values.  The values of our college savings for our children have diminished.  Now what can we do to make the best of the remaining time to save before entering college?

Participation and ownership is needed from the child.  We suggest a three-pronged college funding approach to paying for college.  The parent chips in a third through savings, earnings and appreciated stock.  The child chips in a third through scholarships, grants and their savings.  The final third is taken out through loans in the child’s name first, then the parents.  The parents and/or grand parents can then come back at graduation time and give a gift of paying down some of the loans.   

There are several ways to save for college.  529 plans are the most common but have taken a beating just like other investments in recent months.  With college costs still going up, is it worth the investment?  We say yes it is.  The ability to save taxes on the growth of the investment will be worth it.  While there are several ways to save for education, the 529 plan is still the best method to save for college.

Let’s look at some new changes for the 529 plans.  The IRS has a special rule for 2009 that permits two investment changes for this year only.  Normally only one investment change per year is permitted.  Investments have not performed as profitably as we all have hoped.  Here is an opportunity to modify your investment selection based on the current value of your account and your anticipated additions. 

If you have not been happy with your 529 plan consider a rollover to another plan.  You can roll over one account to another without a tax hit as long as it stays custodian to custodian.  You can change to any state plan, but you should consider any benefits offered from your home state first.  Several states such as New York provides that   contributions to any of New York’s 529 plans of up to $5,000 per year for an individual taxpayer, and $10,000 per year for married taxpayers filing jointly, are deductible in computing New York taxable income.  You should weigh your home state benefits with the costs and investment options.  So for example while New York offers an income deduction, the fees associated with an advisor sold plan range from 0.52% to 2.73% depending on the share class used.  Consider weighing the age of the child along with the state benefit versus the cost and potential gain in the plan.  Sometimes it is worth going outside of your home state for a better plan. 

Some plans charge sales charges or back-end loads of as much as 5.75%.  We find this excessive.  High costs really eat into your investment gains.  With the account values down, the higher cost investments are magnified and take more of the remaining value.  Consider a plan with lower costs.  In most cases low-cost plans have better investment options, which may perform better in the long run.  States that have low-cost direct sold plans include Alaska, Maryland, Nevada and West Virginia.  These plans have costs that run less than 1.00%

For accounts where you know you will not be able to make up the difference and you anticipate the account value will remain at a loss, you may instead want to consider liquidating your “underwater” 529 account and claiming the loss as a miscellaneous itemized deduction on your 2009 taxes.  What do you do then?  If your child is in high school, it may be best to save in a regular taxable savings account.  If your child is younger, you may want to start a new plan by review the various options as previously mentioned. 

Education savings should be reviewed just as all other assets on a regular basis.  Changes should be made where one can find improvements.  There are many 529 plans to choose from and careful review is necessary.

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