Ultimate College Guide 2005

529 College Fund Information

Is there a college bill in your future? Meet an account that may be your most powerful savings tool.

By Penelope Wang, MONEY Magazine. Additional reporting by Mattie Brickman, Jacqueline Chmielnicki, Derek Manson and Christian Yee.

NEW YORK (MONEY Magazine) -- Wouldn't you love to have a 401(k) for college, a simple plan that lets you put aside money regularly, invest in mutual funds and watch the earnings grow tax-free?

Well, you do. It's called a state 529 college savings plan. Open one and you can save vast sums for education, cut your taxes and maybe even pick up a state tax break. Sounds great, yet the $55 billion or so that families have plowed into 529s since 1998 is a pittance compared with the $300 billion it will cost to get this year's freshman class to graduation.

The best 529 plans

What's more, the majority of money going into 529s ends up in high-fee plans sold by advisers rather than in low-cost, do-it-yourself offerings from the likes of Vanguard, TIAA-CREF and Fidelity. That suggests that 529s are a product brokers love to sell but parents still aren't sure they want to buy.

So why don't more people love 529s? For one thing, the plans can be maddeningly hard to understand, and changing rules don't help -- tax-free earnings, added in 2001, are set to expire in 2010 unless Congress acts.

Plus, 529s have attracted some deservedly bad press: High expenses can cancel out your tax savings and drag down returns. Anyone who relies on a financial adviser or broker, in particular, can easily end up in a costly account. Or you could lose out on your own state's tax breaks if a pro steers you into another state's plan. Congress has held hearings on the high cost of 529s, and regulators are looking into sales practices. But no changes have come about.

It would be a shame to let these problems prevent you from taking full advantage of a 529, especially when you consider your goal: The average yearly cost of tuition, room and board at a public college is $11,354; for private colleges, that number now stands at $27,516.

Besides, you can avoid high costs simply by doing some smart comparison shopping. The tax law is casting a shadow over the plans, but even without tax-free withdrawals, a 529 can be a powerful tool.

As for the baffling rules, that's where this story can help. Read on to learn more about 529 features, check out how 529s stack up against other savings options and then click on our 50-state survey of college savings plans at right. Armed with key data on 63 major 529s, you can follow our five steps to narrow your choices and manage your plan.

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