As of writing this, there is $1.748 trillion of student loan debt in the United States and, unfortunately, that number only continues to steadily rise.
I still remember the day when I graduated with my DPT ready to take on the world as a newly minted physical therapist, only to be faced with the harsh reality of my massive student loan balance.
Maybe you had the same experience?
My wife who is an occupational therapist remembers a similar feeling.
After I paid off over $350,000 in student loans, I decided I wanted our child to have a well-funded investment account for his future educational expenses so that he would never experience the same student loan burden we had to face.
That’s when I discovered the excellent option of investing in a 529 account.
Hopefully you’ve already read An Intro On Investing In A 529 Account For Your Child, where the many benefits of investing in a 529 account were all discussed in great detail.
If you haven’t read it yet, I highly recommend doing so before moving forward with this article as it will give you the foundational knowledge you need to understand about 529 plans.
If you have read it, you’re now probably thinking “Great, I understand why a 529 account can be really helpful but which 529 plan should I invest in?”
Contrary to what many believe, you don’t have to invest in your state’s own 529 plan. And since every state offers at least one 529 plan, with many states offering even more than one plan, trying to pick the best 529 account for you can feel quite overwhelming.
So how do you choose?
That’s why I wrote this article – to help you do just that.
Let’s get started.
How Not To Chose A 529 Plan
Before diving into how to choose a 529, it’s important to first discuss what not to do.
Have you ever purchased a car? I’m sure you probably have.
Now, have you ever purchased a car without test-driving the car first just because someone told you the car was great? I bet most of you haven’t.
Choosing the right 529 plan should be a personalized decision.
Sure, there are published rankings out there that will tell you how reliable, safe, and fuel-efficient the car you are considering might be. And that is helpful information to know, but the companies putting out these ranking don’t know that you may need a third row in your car because you have 5 children. Or that you may need an extra powerful air-conditioning system in the car you choose because you living in a very hot climate.
That’s why choosing the best car for you is ultimately a personal decision.
Likewise, there are companies out there that publish lists ranking which 529 plans they feel are the best. And many people simply pick a 529 plan off of this list and just start investing in the plan without a second thought.
However, much the like companies ranking different cars, the companies putting out the 529 rankings don’t know anything about you.
The rest of this article will detail what aspects of 529 plans you should consider to pick the best 529 plan specifically for you. It is actually my hope that two different physical therapists or occupational therapists who go through this list each come to a different conclusion on which 529 account will be best for each of them.
Because we are not one-size-fits all.
Now, let’s talk about what you need to consider.
How To Pick The Best 529 Plan For You
Step #1. Tax Benefits
The first aspect you should consider are the potential tax benefits you can have depending on which 529 plan you choose to invest in.
It is true that all 529 Savings Plans provide the following tax benefits to all 529 investors (refer back to An Intro On Investing In A 529 Account For Your Child to review more details about these aspects):
- Money earned from 529 Plan investments grows on a tax-deferred basis
- Money taken out of a 529 plan is tax-free if used to pay for qualified higher education expenses
- Contributions to a 529 plan can avoid gift taxes and provide estate planning benefits
However, some but not all states also provide state tax deductions or state tax credits.
Every state falls into one of the following categories:
- Provides a state tax deduction or credit if you live in that state and invest in that state’s 529 plan
- Provides a state tax deduction or credit if you live in that state and invest in any state’s 529 plan
- Has no state income tax so does not provide a state tax deduction or credit
- Has state income tax but unfortunately does not provide a state tax deduction or credit
The details of each state’s tax deduction and tax credit opportunities, or lack thereof, can be found in the summary table here:
BOTTOM LINE:
The takeaway here is that, if the state you live in offers a state tax deduction or credit, then you may be better off investing in one of your state’s 529 plans. This is not a hard and fast rule though, as you will want to also weigh the other factors that will be discussed below.
On the other hand, if you do not get a state tax deduction or credit by investing your state’s 529 plan either because your state does not have an income tax or because your state does have state income tax but just doesn’t offer a state tax deduction or credit, then the next factors that will be discussed will be even more important for you to consider when choosing the 529 plan that will fit you best.
Step #2. Choosing The Type of 529 Plan
Now that you have an idea on which state(s) you are considering for your 529 plan, you will need to decide which type of 529 plan suits you best.
There are two different types of 529 Plans: 529 Savings Plans and 529 Prepaid Tuition Plans.
You will need to decide which one of these you want to invest in.
You can refer back to An Intro On Investing In A 529 Account For Your Child for details on each of these.
BOTTOM LINE:
Simply put, my recommendation is to invest in a 529 Savings Plan unless you are 100% sure that you child will only be going to an in-state college or university.
Step #3. Choosing Who Will Manage Your 529 Plan
If you’re like me and you’ve decided that a 529 Savings Plan will suit you best, you will next want to decide if you want to manage the 529 account yourself or if you want a broker doing that for you.
Before you jump to any immediate decision on this, let’s first look a little deeper into the pros and cons of these two options.
A. Direct-Sold Plans
The phrase “Direct-Sold Plan” is used to describe a 529 plan that you invest in directly with the state sponsoring the plan. Because you are investing directly with the state, you must manage the account yourself including making investment decisions. This is all generally done online.
Since you are doing it all yourself, this reduces the cost of maintaining the 529 account, which means more money stays with your investment.
B. Advisor-Sold Plans
The phrase “Advisor-Sold Plan” means the 529 account is still sponsored by the state but a third-party advisor is being brought in to manage the account for you.
Much like an investment advisor for other types of investments (e.g. retirement accounts), the advisor will help with managing the account for you but you will incur more fees for this service.
These fees are called sales/load charges, which we will cover in the next section.
BOTTOM LINE:
I don’t think investing needs to be as complicated as many make it out to be. My preference is to keep it simple and decrease costs so that more of my money stays with my 529 investment. That’s why I prefer Direct-Sold Plans.
Step #4. Assessing Cost
Costs related to having a 529 are so important to consider.
We already mentioned in Step #3 how having an investment advisor increases your costs and therefore puts less money in your 529 investment account.
But that’s not the only cost you can get stuck paying.
The United States Securities And Exchange Commission (SEC) lists these as other potential fees you may encounter:
A. Enrollment/Application Fee
As of the writing of this, none of the Direct-Sold 529 Plans have any Enrollment or Application fees.
B. Annual Account Maintenance Fees
This fee is not common and, when this fee is charged, it is usually a nominal amount (e.g. $10-$25/year).
This fee can also sometimes be waived if the 529 account’s owner or the beneficiary is a resident of the 529 Plan’s state.
C. Ongoing Program Management Fees
It is typical for a state to hire a third party to look after the 529 plans that state is sponsoring. The state pays that third party an amount that is a percentage of the total assets that the third party has to manage.
This fee is passed to the 529 investors, you, in the form of a percentage of your own 529 investment. The fee you pay can be as small as 0.02% of your investment or as much as nearly 1.00% of your investment.
D. Ongoing Asset Management Fees/Sales Charges
i. Expense Ratios
In order to be able to invest in a particular fund, you have to pay a fee that goes towards compensating those managing that fund.
This fee is called the expense ratio and the amount you must pay is a percentage of how much you invest.
According to a Morningstar in 2021, the average expense ratio for asset-weighted funds was 0.40%.
An expense ratio is typically greater with mutual funds but less with an Exchange-Traded Funds (ETFs).
We’ll talk more about ETFs later on.
ii. Sales Loads/Charges
If you chose to invest in an Advisor-Sold 529 Plan, you will have to pay your advisor for this service. This payment is called the sales load or sales charge (you may also hear it just called a “load”). The amount you must pay is a percentage of your investment, typically between 0.5-2%.
If you chose to invest in a Direct-Sold 529 Plan, you will not have an advisor and therefore you will not have to pay sales load.
BOTTOM LINE:
Some 529 plans include more of these fees than other plans. Of the 529 plans you are considering up to this point, you will need to figure out which have higher fees and which have lower fees.
A helpful resource you can check out is the 529 Fee Study conducted by Saving For College. It gives an overview on how much and how little Direct-Sold 529 Plans for each state can cost.
Again, it comes down to less fees means more money in your 529 investment.
The SEC recommends investing with Direct-Sold 529 Plans as oppose to Advisor-Sold Plans to reduce the amount you will pay in fees, and I agree.
Use the Saving For College Fee Study above to figure out which of the 529 plans you are considering up to this point may be less expensive.
One other tip the SEC offers is that some 529 plans will decrease or altogether dismiss some fees, like maintenance fees or administrative fees, if you do one of the following:
- Live in that 529 plan’s state
- Keep a high balance in your 529 account
- Utilize automatic contributions for your 529 account
- Utilize paperless document delivery
Step # 5. Investment Options
You will want to choose a 529 plan that has investment options that suit your needs. Your needs should depend on your risk tolerance which should take into account how long you plan to keep your money invested before needing to use it to pay for qualified educational expenses.
Scenario #1: Shorter Duration Of Time To Invest
Let’s say your investment horizon is relatively short because you child will be graduating from high school and starting college next year. You want to start investing in a 529 Plan now to get some of the tax benefits we talked about earlier, but you want to minimize the amount of risk you take on to ensure the money will still be there when you child needs it soon.
A FDIC Insurance Investment might be an option you want to consider.
Some but not all 529 Plan investments are Federal Deposit Insurance Corporation (FDIC) insured. This means that they are backed by the United States Government up to a certain amount in the instance the bank defaults.
The types of investments that are FDIC insured are Certificates of Deposit (CDs) and Savings Accounts.
While these types of investments may not typically offer the greatest return, they can offer more stability by having less risk. This can make these types of investments more appropriate if the time you have to invest is much shorter.
For example, if you child is about to graduate from high school and they will need to start using the money in the 529 account soon, an FDIC type of investment can be an option to consider.
As of writing this, there are 18 states currently offering at least one FDIC-insured investment option:
1. Arkansas
- OPTION #1:
- 529 Plan: GIFT College Investing Plan
- FDIC-insurance Investment Option: GIFT Plan Savings Portfolio
- OPTION #2:
- 529 Plan: iShares 529 Plan
- FDIC-insurance Investment Option: Savings Portfolio
2. Arizona
- 529 Plan: Fidelity Arizona College Savings Plan
- FDIC-insurance Investment Option: AZ Bank Deposit Portfolio
3. Colorado
- 529 Plan: Smart Choice College Savings Plan
- FDIC-insurance Investment Option: Money Market Savings Account
4. Delaware
- 529 Plan: Delaware College Investment Plan
- FDIC-insurance Investment Option: DE Bank Deposit Portfolio
5. Idaho
- 529 Plan: Idaho College Savings Program
- FDIC-insurance Investment Option: Savings Portfolio
6. Indiana
- OPTION #1:
- 529 Plan: CollegeChoice Advisor 529 Savings
- FDIC-insurance Investment Option: Savings Portfolio
- OPTION #2:
- 529 Plan: CollegeChoice CD 529 Savings Plan
- FDIC-insurance Investment Option: Savings Account
- OPTION #3:
- 529 Plan: CollegeChoice 529 Direct Savings
- FDIC-insurance Investment Option: Savings Portfolio
7. Kentucky
- 529 Plan: KY Saves 529
- FDIC-insurance Investment Option: Capital Preservation Option
8. Massachusetts
- 529 Plan: U.Fund College Investing Plan
- FDIC-insurance Investment Option: MA Bank Deposit Portfolio
9. Maine
- OPTION #1:
- 529 Plan: NextGen College Investing Plan – Client Direct
- FDIC-insurance Investment Option: NextGen Savings Portfolio
- OPTION #2:
- 529 Plan: NextGen College Investing Plan – Client Select
- FDIC-insurance Investment Option: NextGen Savings Portfolio
10. Nebraska
- OPTION #1:
- 529 Plan: Nebraska Education Savings Trust – Advisor
- FDIC-insurance Investment Option: Bank Savings
- OPTION #2:
- 529 Plan: Nebraska Education Savings Trust – Direct
- FDIC-insurance Investment Option: Bank Savings
- OPTION #3:
- 529 Plan: State Farm College Savings Plan
- FDIC-insurance Investment Option: Bank Savings
11. New Hampshire
- 529 Plan: UNIQUE College Investing Plan
- FDIC-insurance Investment Option: NH Bank Deposit Portfolio
12. Nevada
- 529 Plan: SSGA Upromise 529
- FDIC-insurance Investment Option: Savings Portfolio
13. Ohio
- 529 Plan: CollegeAdvantage Direct 529 Savings Plan
- FDIC-insurance Investment Option: Fifth Third 529 Savings Account
14. Oregon
- 529 Plan: Oregon College Savings Plan
- FDIC-insurance Investment Option: FDIC-Insured Option
15. South Carolina
- OPTION #1:
- 529 Plan: Future Scholar 529 College Savings Plan – Advisor
- FDIC-insurance Investment Option: Columbia Bank Deposit 529 Portfolio
- OPTION #2:
- 529 Plan: Future Scholar 529 College Savings Plan – Direct Sold
- FDIC-insurance Investment Option: Future Scholar Bank Deposit Portfolio
16. Tennessee
- 529 Plan: TNStars College Savings Program
- FDIC-insurance Investment Option: TN First Interest Bearing Account
17. Utah
- 529 Plan: my529
- FDIC-insurance Investment Option: FDIC-Insured Option
18. Virginia
- 529 Plan: Invest529
- FDIC-insurance Investment Option: FDIC-Insured Option
Scenario #2: Longer Duration Of Time To Invest
Now let’s say you just had a baby and you want to start investing in a 529 account to save for when you anticipate they will go to college in about 18 years.
Investing in the previously mentioned a FDIC insured CD or Savings Account may sound less appealing given the low ceiling for the return on your investment. In other words, you’ll probably be willing to take on more risk with the potential for a greater return on your investment.
The amount of risk you will want to take on is, of course, up to you. But one popular option that is worth bringing up is investing in Exchange-Traded Funds (ETFs).
What are ETFs?
Think of an ETF like a mutual fund. An ETF is a group of different investments (like stocks) brought together to form one single investment.
There are differences between mutual funds and an ETFs, but that’s a discussion for another day.
Here are some advantages that ETFs offer:
A. Decreased Cost
ETFs are simple investments that won’t require you to have an advisor actively managing your account. No advisor equals less cost and that equals more money staying in your 529 investment account.
B. Decreased Risk
Again, like a mutual fund, spreading your money over several different investments (all found within your ETF of choice) can decrease your investment risk.
There are other advantages to investing in ETFs outside of a 529 account, but these advantages are lost when investing in a 529 account so they will not be discussed here.
As of the writing of this, the 529 Plans listed below are currently offering the option of investing in ETFs:
1. Arkansas
- 529 Plan: iShares 529 Plan
2. District of Columbia
- 529 Plan: DC College Savings Plan
3. Illinois
- 529 Plan: Bright Directions Advisor-Guided College Savings Program
4. Indiana
- 529 Plan: CollegeChoice Advisor
5. Kansas
- 529 Plan: Schwab 529
6. Maine
- Option #1:
- 529 Plan: NextGen Client Direct
- Option #2:
- 529 Plan: NextGen Client Select
7. Missouri
- 529 Plan: MOST 529
8. Montana
- 529 Plan: Achieve Montana
9. Nebraska
- Option #1:
- 529 Plan: Nebraska Education Savings Trust – Advisor College Savings Plan
- Option #2:
- 529 Plan: Nebraska Education Savings Trust – Direct College Savings Plan
- Option #3:
- 529 Plan: State Farm College Savings Plan
- Option #4:
- 529 Plan: TD Ameritrade College Savings Plan
10. Nevada
- Option #1:
- 529 Plan: SSgA Upromise
- Option #2:
- 529 Plan: Wealthfront 529 College Savings Plan
11. New York
- 529 Plan: New York 529 Advisor Guided College Savings Program
12. North Dakota
- Option #1:
- 529 Plan: College SAVE (Advisor)
- Option #2:
- 529 Plan: College SAVE (Direct)
13. Ohio
- Option #1:
- 529 Plan: BlackRock CollegeAdvantage Advisor 529 Savings Plan
- Option #2:
- 529 Plan: Ohio’s 529 Plan, CollegeAdvantage
14. Rhode Island
- CollegeBound Saver (Direct-Sold)
15. South Carolina
- Option #1:
- Future Scholar 529 College Savings Plan (Advisor-Sold)
- Option #2:
- Future Scholar 529 College Savings Plan (Direct-Sold)
Step #6. Investment Company
I bring this up because some of us will have a preference to invest with one company over another.
Why?
There are several possible answers to this question.
For one, maybe your other investment accounts are already with one investment company so having your 529 account with that same company just makes things more simple.
Or maybe you prefer the investment options that company has to offer.
Or maybe you just find the interface of that company’s website easier to navigate.
Whatever the reasons are, be sure that the 529 plan you choose has the investment company you prefer to invest with.
Step #7. Investment Performance
While discussing the details of investing is outside the scope of this article, I would be remiss if I did not mention the importance of looking at how the 529 Plan that you are considering investing in has performed up until now.
That said, I caution you here, as past investment performance does not guarantee future investment results.
Step #8. Minimum And Ongoing Contributions
Horary, you’ve made it this far! You may have narrowed down the 529 Plans you are considering to two or three choices or maybe you think you’ve already chosen the 529 Plan you’d like to start investing in.
Before you start, though, you do want to make sure that you can make the minimum contribution requirements.
Similar to maintaining the minimum balance in your bank’s checking account, you don’t want to find yourself choosing a 529 Plan that you can afford to invest in.
There are two important minimum investment contributions you need to know about.
A. Minimum Initial Investment Contribution
This is the minimum amount that you will be required to deposit into the 529 Plan in order to open your investment account.
This amount can vary greatly depending on the 529 plan.
Amounts can be as little as no money at all to as much as a few hundred dollars or even a few thousand dollars.
Some 529 Plans decrease this amount, though, in certain specified circumstances such as being a resident of that 529 Plan’s state.
B. Minimum Continuing Investment Contributions
This is the minimum amount that you will be required to deposit into the 529 account on a regular basis.
The minimum continuing investment contributions can vary from one 529 Plan to another, but not as greatly as the minimum initial investment. Instead, 529 Plans typically range from no money at all to typically less than $100 per month.
Step #9. Commonly Recommended 529 Plans
Hopefully by now you have a good idea as to which 529 Plan will suit you best.
If you’d still like some extra guidance, though, the publication Morningstar regularly releases a ranking list of what it deems to be the best 529 plans. Morningstar ranks the 529 plans by giving a Gold designation, a Silver designation, a Bronze designation, or by not ranking the plan at all.
Below are the 529 plans Morningstar ranked highest. Other than listing the Gold-rated plans ahead of Silver-rated plans, the 529 plans are in no specific order.
To give you even more information, I have also listed each of these plan’s fees. The Plan Fee is a total of the plan’s Program Manager Fee, Administrative Fee, and the Cost of the Underlying Investment. Since I am a believer in investing with the lowest plan fees possible, the lowest fee is what I list for you here.
However, since the lowest expense ratio can be very similar across the board, I have provided you with both the lowest and highest expense ratios the plan offers.
You can use the 529 plans listed as a starting point to find the best plan for you:
1. Michigan’s Direct-Sold Education Savings Program
- Morningstar Rating: Gold
- Plan Fees: As low as 0.065%
- Expense Ratio: As low as 0.065%-0.185%
- Investment Options: TIAA-CREF, Vanguard, Schwab, and iShare
2. Utah’s Direct-Sold my529 College Savings Plan
- Morningstar Rating: Gold
- Plan Fees: As low as 0.11%
- Expense Ratio: 0-0.037%
- Investment Options: Vanguard, Dimensional, PIMCO, and FDIC-insured accounts
3. Illinois’s Direct-Sold Bright Start College Savings Plan
- Morningstar Rating: Gold
- Plan Fees: As low as 0.08%
- Expense Ratio: 0.07%-0.82%
- Investment Options: Vanguard, Dimensional, T. Rowe Price, Dodge & Cox Funds, BlackRock, Baird Funds, Ariel Investments, Invesco, BNY Mellon, Nuveen, DWS, and UBT/NelNet
4. Alaska’s Direct-Sold T. Rowe Price College Savings Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.02%
- Expense Ratio: 0.16%-0.88%
- Investment Options: T. Rowe Price
5. California’s Direct-Sold ScholarShare College Savings Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.01%
- Expense Ratio: 0.05%-0.46%
- Investment Options: T. Rowe Price, TIAA-CREF, Dimensional, Vanguard, MetWest, and PIMCO
6. Georgia’s Direct-Sold Path2College 529 Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.06%
- Expense Ratio: 0.06%-0.12%
- Investment Options: TIAA-CREF, Dimensional, and Vanguard
7. Maryland’s Direct-Sold Senator Edward J. Kasemeyer College Investment Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.13%
- Expense Ratio: 0.13%-0.66%
- Investment Options: T. Rowe Price and Vanguard
8. Minnesota’s Direct-Sold College Savings Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.1225%
- Expense Ratio: 0.12%-0.28%
- Investment Options: TIAA-CREF, Vanguard, and Dimensional
9. Missouri’s Direct-Sold MOST 529 Education Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.20%
- Expense Ratio: 0.17%-0.42%
- Investment Options: Vanguard and Dimensional
10. Nevada’s The Vanguard 529 College Savings Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.12%
- Expense Ratio: 0.12%-0.42%
- Investment Options: Vanguard
11. New York’s Direct-Sold 529 College Savings Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.12%
- Expense Ratio: 0.12%
- Investment Options: Vanguard
12. Ohio’s Direct-Sold College Advantage 529 Savings Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.127%
- Expense Ratio: 0.145%-0.435%
- Investment Options: Vanguard and Dimensional
13. Oregon’s Direct-Sold College Savings Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.22%
- Expense Ratio: 0.20%-0.65%
- Investment Options: American Beacon, Champlain, Dimensional, DoubleLine, LSV, MetWest, TIAA, T. Rowe Price, and Vanguard
14. Pennsylvania’s Direct-Sold College Savings Plan
- Morningstar Rating: Silver
- Plan Fees: As low as 0.19%
- Expense Ratio: 0.205%-0.305%
- Investment Options: Vanguard
Final Thoughts. . .
I hope you now feel more comfortable figuring out which 529 plan will suit you best.
Just remember to start by looking at the state you live in. If you’ll get a tax deduction or credit by investing in your state’s 529 plan, then that might be your best bet.
But do still take a look at the points covered above to see what other 529 plans have to offer before moving forward.
There was a lot covered here, if you have a question or just a comment on something you’d like to add, leave a comment in the section below!
