There are only a handful of ways to earn a debt-free degree: 1) have someone else pay for college, 2) combine community/commuter college with savings or 3) save up for the entire amount and combine with grants.
The third option is hardest for most families because it’s a long-term proposition. You have to plan for it and save diligently. But if you choose the savings route, you have plenty of options to choose from.
Every state offers a 529 saving plan. These vehicles offer portfolios of mutual funds that allow you to accumulate money over time. If you use the proceeds for college expenses, the withdrawals and earnings are tax free. Some states even give you an extra tax deduction on contributions.
Why do 529 plans make sense? You can choose pre-selected “age-based” mutual fund portfolios that reduce stock market risk the closer a child gets to college. Or you can choose your own funds, which I don’t recommend.
Under recent changes in federal tax law, you can also use 529 plan proceeds to fund private elementary and high school tuition, although withdrawals are capped at $10,000 per year per student.
The best-performing 529 plans combine sensible management with low costs. I recommend funds that are “direct sold,” meaning you buy them directly from the state sponsors. That way, you avoid paying a commission, which eats directly into your college savings.
Every year, the Web site SavingforCollege.com rates the best plans by performance. Here are the best-returning plans from 2017, based on 10-year returns.
Top-Performing 529 Plans
Pennsylvania 529 Investment
Nevada USAA 529 College Savings
New York’s 529 College Savings Program
College Savings Iowa
Learning Quest 529 (Kansas)
One note of caution: When selecting a plan look at a number of things. First, see if your home state is giving you a tax break on contributions. That’s your first consideration.
Second, look at the overall cost of the plans. They all have embedded fees. The state will take a cut along with fund managers, expressed in “expense ratios.” The lowest-cost plans have index mutual funds in them.
If you don’t like the cost and performance of your state’s offerings, then you can choose other state plans. But always look at the whole package, including possible tax savings, before going out of state.
My wife and I, for example, went out of state to set up 529 plans for our daughters. That’s because when we started saving, our state’s plans were expensive and poorly managed.
Finally, start early and save often. Make regular contributions. Have friends and family contribute for birthdays, special events and holidays. The more you save, the lower the probability your family will go into debt later.
