I am interested in saving for college for my 8 month old daughter, are 529 plans the best way to save and how do I find the best plan?
Last year, private college costs increased at 6.3% and public college costs increased at 6.9% according to The College Board, so it makes sense to start saving for college as early as you possibly can. Starting before your daughter turns one will reduce the amount you need to save each month. If she goes to a college costing $20,000 per year, you need to be saving approximately $500 per month if you can start now and earn 7% on your investments. Wait 5 years and the monthly savings increases to $750 per month.
I used to be a fan of saving for college by using the Coverdell Savings Accounts and 529 plans because money saved in Coverdells could also be used to pay for private elementary and secondary school expenses if needed, but that won't be the case in 2011. Now, I focus almost exclusively on 529 plans. As I've mentioned in previous posts, I like the Fidelity UFund and the College Savings Plan of Nebraska. Both of these direct-sold plans were recently recognized as top performing plans on Joe Hurley's savingforcollege.com website. The other top plans included:
West Virginia's SMART 529 Plan
Kansas' Learning Quest 529 Plan
Nebraska's TD Ameritrade 529 College Savings Plan
Kansas' Schwab 529 Plan
Missouri's MOST 529 Plan
Indiana's CollegeChoice 529 Investment Plan
Nevada's UPromise College Fund
Utah's Education Savings Plan
This list contains only those plans that are "direct sold", which means that parents invest in the plans directly. The same website also maintains a list of "broker-sold" plans. Direct sold plans tend to have lower expenses, so if you don't feel you need advice about how much to save and what savings vehicle to use, a direct sold plan will probably meet your needs.
Remember that you are free to invest in any state's plan -- you can live in Massachusetts, invest in Utah's 529 Plan, and send your child to college in New York. Many states offer deductions or credits for 529 plan contributions but, unfortunately, Massachusetts does not.
Later this week, I will talk about the broad categories of investment options offered within 529 plans.
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