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COLLEGE SAVINGS 101

5 college-savings trends may help steer your plan

Posted: 2009-11-13

by Lori Johnston

It's that time of year when many parents and grandparents take a look at their college savings portfolios with an eye toward adjusting the way they have assets allocated.

Reviewing national trends in savings and investment strategies by others might help you make some savvy decisions.

Total assets in 529 college savings plans in second quarter 2009 jumped 14.7 percent to $98.6 billion, according to data by the Washington, D.C.-based College Savings Foundation and Boston-based Financial Research Corp.

That's an increase from $85.9 billion in first quarter 2009, but still an 11 percent dip in asset levels from 2008.

Experts focused on five findings in the foundation's quarterly report and "The State of College Savings" survey, released in fall 2009. See what you can learn from how others are using or investing in their 529 plans.

  1. Trend: Parents are taking fewer assets out. The quarterly report noted an increase in net sales -- new investments minus redemptions. The 9 percent rise in net sales, to $531 million among reporting College Savings Foundation members, was up from $487 million in the first quarter.

    Why this is important to you: Many parents have held back on redeeming 529 assets while market performance affected accounts, says Roger Michaud, treasurer of the College Savings Foundation and senior vice president with Franklin Templeton Investments, based in Short Hills, N.J.

    "It's very intelligent investor behavior," says Greg Brown, a mutual fund analyst with Morningstar in Chicago who compiles an annual study of the best and worst 529 plans. "That's exactly what we would want to see."

    Recommended strategy: Wait to use those assets, if you can, until next fall or even in 2011, to take advantage of the market rebound. Some are choosing to use other avenues such as grants, scholarships, loans and gifts from grandparents and other family members to pay for current or early 2010 education costs, Michaud says. If you can reduce your expenses or not tap into them immediately, you could fare better in the market's recovery, Brown says.

  2. Trend: Parents are likely to save more with 529 plans. The foundation's report touted the benefits of 529 plans, including that 61 percent of parents using 529s had saved at least $5,000 per child, versus only 22 percent of those without a 529 plan.

    Why this is important to you: Setting up a 529 plan will put you on a path toward saving, even if your child's college education is 18 years away.

    "Typically, people that decide and set up a 529 are obviously going to have money in it and they're diligent and serious about saving as opposed to people that don't have a 529," Brown says.

    Recommended strategy: Don't be paralyzed by the end cost of a college education. Brown adds that people see the thousands and thousands of dollars required to pay for college and say, "Why on earth would I open up a $100 account and put $50 in them (monthly)?"

  3. Trend: Parents are unaware of future costs. The report found that 74 percent of parents do not even know how much they need to save, up from 70 percent last year.

    Why this is important to you: Even if you don't know exactly how much college is going to cost, parents need to save. "No matter how much it's going to help," Brown says.

    Even though some people have reduced the size of their investment because of the economy, he points out that they still are continuing to invest something. In fact, the foundation found that 28 percent -- up from 22 percent in 2008 -- have saved less than $5,000 per child. About 30 percent of those are invested in a 529.

    The foundation projects, assuming college costs increase by 5 percent a year, four-year public college tuition in 15 years could reach more than $100,000 and four-year private college tuition in 15 years could exceed $200,000

    Recommended strategy: Take the time to create a goal of how much you want to save based on how much time you have and the appropriate vehicles, like 529 plans, Michaud says. Do your homework by using our calculators to estimate future college costs.

  4. Trend: Parents who make regular contributions are likely to save more. Some 20 percent of parents use an automatic savings strategy -- whether in a 529 plan or another investment vehicle. Of those, 63 percent had saved more than $5,000 per child, compared to 22 percent without one. As for the amounts, 35 percent have saved $100-$300 a month.

    Why this is important to you: Starting early and investing systematically, even with low amounts, could put you in the habit of saving more. You could open with $25 and save $50 a month and then move up to contributing $200 a month. The foundation found that after dropping to 31 percent in fourth quarter 2008, automatic funding returned to 38 percent in first quarter 2009, with the same amount in second quarter 2009.

    Recommended strategy: Brown says automatic savings arrangements are powerful for investors. He describes them as "hands-free" investing, similar to setting up an automatic renewal for a product.

  5. Trend: Parents tend to do it all by themselves. The foundation's survey showed 72 percent of investors expect no help in paying for college at all hasn't changed since the 2008 "The State of College Savings" Survey by the foundation.

    Why this is important to you: The 22 percent of investors who expect help from grandparents hasn't changed since the 2008 "The State of College Savings" survey by the foundation. But, as the holidays approach, it's interesting to note 27 percent say they would ask friends and family to contribute to college rather than material gifts.

    Recommended strategy: Reach out to extended family to contribute to 529 accounts, Michaud says. "Grandparents across the board have said that they fully intend or would like to contribute to their grandchildren's college expenses, but very few of those parents have had that conversation," he says. The foundation recommends asking friends and family to trade toys for tuition.

Posted November 13, 2009

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