Q: I am looking for a 529 plan for my grandson. Do you have an idea on some of the better plans that seem to produce more than others? I live in Minnesota and found some plans in other states charge lower rates than others.

Pat

A: A 529 plan can be opened in most states with less than $100. The account is funded with after-tax dollars, but the money grows tax-deferred. Withdrawals on the accumulated savings are tax-free so long as the money goes toward qualified educational expenses, such as tuition and books. You can own an account in any state and the savings can be spent on any accredited public and private college in any state.

That said, make sure you won’t need the money you plan on setting aside. The sentiment to help defray the cost of college is wonderful. But you want to be clear-eyed about how much you can afford.

Second, from a financial aid point of view it pays to have the parents open the account in their name with the grandchild the beneficiary. Grandparents contribute money into that plan. The federal financial aid formula treats a 529 in the parents’ name as a parental asset, which means the student’s eligibility for federal financial aid will decrease by no more than 5.64 percent of the account’s value. It gets more complicated if the account is in the grandparents’ name.

The account itself won’t affect the grandchild’s eligibility for need-based financial aid. However, when the 529 is tapped it affects the formula for the following year. For example, if the account is used freshman year it’s counted as a student asset for subsequent years. Student assets are assessed at a 20 percent rate. (The drawback doesn’t matter if the savings goes toward paying only for senior year expenses.)

In other words, there is nothing simple about the financial aid rules. To simplify plan choice, it’s usually cheaper to buy a 529 plan sold directly by the state. Most of the plans sold through broker-dealers are more expensive. Of course, you typically have more options with the latter, but in general I prefer plain vanilla broad-based investment options anyway. A useful website for researching plans is savingforcollege.com. Morningstar, the financial rating company, also offers detailed information on fees and performance of 529s. A good general resource is Mark Kantrowitz at Edvisors.com.

 

Chris Farrell is senior economics contributor for American Public Media’s Marketplace programs and economics commentator for Minnesota Public Radio.