NCPA - National Center for Policy Analysis

Some College Savings Plans Offer Poor Returns

July 10, 2002

So-called 529 College Savings Plans have proved to be highly popular among couples with children they hope will one day be college bound. But a survey by USA Today of all 43 state plans found many offer low returns, and tax deductions don't compensate for poor management.

  • Nearly $200 billion is expected to flow into the plans by 2007 -- up from a projected $25 billion in 2002.
  • The plans offered consist of a wide range of investment options -- from low-yielding, ultra-conservative portfolios to aggressive funds which might, or might not, allow a high school graduate to attend a pricey college or university.
  • Under recent less-than-optimal market performances, many plans sold by brokers have turned in poor financial results -- though some have stemmed losses by diversifying.
  • One of their major attractions is that they grow free of federal taxes and most also make withdrawals free of state taxes.

The analysis found that in many cases, the smallest plans offered the best performances for the lowest costs. But many plans are poorly diversified and state fees and expenses can eat into gains.

Investment advisers contend that in many cases tax deductions won't compensate for poorly managed plans.

Source: Sandra Block and John Waggoner, "529 College Plan Choices Are All Over the Map," USA Today, July 8, 2002.

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