New Morningstar Study: Interesting Facts About 529 College Savings Plans

Morningstar recently released its annual 529 College Savings Plan study [pdf] for 2010. You can read about the final product Top 5 plans here (using some subjective judging components), but the paper also had some stats that I felt were note-worthy for those not wanting to read all 48 pages of it.

Broker-sold plans make up 52% of all 529 plan assets, direct-sold make up the other 48%. I guess I shouldn’t be, but I was surprised that only half of assets are by parents not going through a broker or financial advisor.

The average 529 balance was $9,700, which is a bit more than one year of tuition at a in-state public university (average $7,020) and much less than half a year of tuition of an out-of-state public school ($18,548) or a private college or university ($26,273). I wonder what the median is, to negate the effect of the tiny accounts.

Parents typically open accounts for their children when they are between the ages of 7 and 10, giving most families about a decade to save before their first tuition bill comes due. With only a decade, I would be wary of putting a big chunk in stocks. Many providers have already changed their “age-based” portfolios to hold less stocks. Only after the market drop, of course…

Here is a chart showing the industry average “glide path” for age-based investment options:

Roughly estimating, I see about 60% stocks for an 8-year old with a decade left before college. Before choosing such an option in your own 529, it’s important to see what your specific age-based glide path is. Many now have multiple options for conservative, moderate, and aggressive.

The asset-weighted total average expense ratio for direct-sold plans is between 0.49-0.64% annually, depending one if the plan allows investment options outside the program manager’s. The asset-weighted total average expense ratio for advisor-sold plans is between 1.16%-1.52%.

The five cheapest direct-sold 529 plans, ranked by asset-weighted total expense ratios, are:

  1. New York’s Direct 529 Program (0.25%)
  2. Utah Education Savings Plan (0.28%)
  3. The Vanguard 529 College Savings Plan, Nevada (0.28%)
  4. CollegeAdvantage 529 Savings Plan, Ohio (0.29%)
  5. College Savings Iowa 529 Plan (0.34%)

Keep in mind that this is based on actual assets held by savers, not just based on the cheapest option available in a plan. Many of these plans offer some actively-managed options for those that wish to partake.


  1. #4 on the least expensive list should be Ohio? The glide path looks really aggressive to me. Maybe it’s just me.

  2. @TFB – Thanks, fixed that and a bunch of other typos from being in a rush.

    I agree the glide path is too aggressive, and it shifts to being very light in stocks way too fast in my opinion. It gives the appearance of adjusting risk well with age, when in reality the main thing that matters is how stocks happen to perform the first few years you’re invested.

  3. We started our son’s 529 when he was born. He’s 2 and has more in it now than I had when I left for college 18 years ago. I can’t imagine waiting on this.

  4. I use the West Virginia Select plan. It is one of the few ways to get access to Dimensional Fund Advisors Inc. other than having a large net worth or paying a fee to an adviser. Performance wasn’t so hot over the annualized 5 years, but it seems to be doing good (due to the rally) since we’ve had it.

  5. Hooray! We have two of the top three least expensive of our kids! Our 7 year old is in the New York Diresct and our 5 year old is in the Vanguard Nevada. We are not in any actively managed options. We choose to go with two different ones to diversify. We particularly like the International option in the Nevada plan. We are not in any age based options. We established each one the year the kids were born to have as long a time horizon as possible. We also have Education IRAs for eeach child to further diversify! It was scary two years ago to lose principle, but we kept our monthly investments going (bought low) and things look good now.

  6. While an 8 year old only has 10 year until they go to school. They have a lot longer to pay back the loans accrued through school.

    My student loans are 20 year loans, and over half of them were at rates, that i wouldn’t want to pay back(1.625%).

    So while this will depend on the details of each child’s loans, if the stock market didn’t rebound when the child was 18, if they can get good student loans, they can wait for the market to come back a little.

  7. According to my Quicken summary, I spent $90,000 for child #1 to finish her 5 yrs at the state college. Child #2 just started and Child #3 in 7 years. The 90K was for tuition, fees and room/board. She had a job for the full time she was there for incidentals and fun money. Fortunately, her 529 was in a guaranteed fund (3.85%) throughout the downturn.

    If you have kids that are around 10 now, count on $150K. If they’re very young – probably $200K. Private schools – add at least another 50%.

    Talk Junior into attending community college the first couple years and save a ton.

  8. I chose to invest for my daughter’s college savings through a Vanguard Coverdell ESA. I didn’t like how all 529 plans charged a premium for extra “management” by the state that sponsors the fund. For example, the Total Stock Market index fund in the 529 plan has an operating expense of .25%. Outside of the fund, it has an operating expense of .18%. Through Vanguard’s Coverdell ESA, I was able to invest in Vanguard funds at their normal cost. Furthermore, I suspect that I will be able to take advantage of lower cost Admiral Shares once my account balances exceed $10,000.

    Coverdell ESAs currently allow you to contribute up to $2000 a year and in addition to using that money for college, it can also be used for elementary, middle, and high school expense. However, if congress doesn’t act before the end of the year, the contribution limit will drop to $500 a year and would only be able to be used for college.

  9. We started our daughter’s when she was born and we have another one on the way. So we are going to do the same. Granted there is no guarantee that they will go to college, but I rather be prepared and think positive about it. I cannot imagine waiting until 8 years old to start. Take advantage of the fact that you will probably have more money when they are younger than when they are older. So start as soon as you can.

  10. Do you ever consider the fact that having money in a 529 plan will reduce your kid’s financial aid package? That has to substantially reduce the returns of this “investment”. From the research I have done, assets in retirement accounts (401Ks) and primary residences do not count as assets in the financial aid consideration. My take on this, is that it is better to first max out your 401K and pay off your mortgage before contributing to a 529.

  11. Paying off your mortgage with an extra $500 a month may work in some places but by my estimates…we’d still have a couple more years to go on the house; but doing the 529 at $500 a month the kid would have over 200k waiting for him when he turns 18.

  12. Shannon: Did you consider that, save the few exceptions that you mentioned, all parental assets reduce a child’s financial aid?

    In any case, you should be taking care of your retirement savings and mortgage, not due to some possible future financial impact on your child that saving in a 529 might have, but because taking care of your own financial security relieves your children of that burden. What’s the point of saving for your child’s education if you’ll be homeless and broke in your old age?

  13. Jamie, I realize that most parental assets can reduce the financial aid, but I think there are ways to take advantage of the primary housing and 401K exemption.

    My argument is that the potential tax benefits of a 529 plan will be reduced by the thousands of dollars decrease in the financial aid package over the 4 years (hopefully 🙂 ) of college. I don’t have any kids yet, but my plan is to max out the 401K and work on paying down the mortgage. I’ll use savings or a home equity loan to cover college costs. This seems like the best way to get more financial aid. Too bad there isn’t a great way to simulate the financial aid package for different situations…to test this theory.

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