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Tough Times

The Best Ways to Save For College Now

The Obama Administration, Congress, dozens of states and even Internal Revenue Service are affecting your best options for socking away cash for your children’s college education. Meanwhile, the administrators of a few 529 college-savings plans and unscrupulous insurance salespeople might steer you down the wrong road.

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Deborah Russell of Phoenix and her husband, Chris, started college-savings plans for their 8-year-old twins, Rylee and Wyatt, before the children were born. Along with buying savings bonds, they opened Qualified State Tuition Program accounts, which are also known as 529 plans. The Russells make automatic contributions of $30 per month per child to the 529 plans. But because of the economic downturn and the stock-market plunge, their contributions barely have kept up with the losses. Does that sound familiar?

The market likely will recover before Rylee and Wyatt need that tuition money, and it was smart for Russell to include savings bonds in the mix, because they won’t depreciate in value. But other parents are right on the money to wonder which choices make the most sense in this painful economic climate.

THE 411 ON THE 529s. Many parents are drawn to 529 plans because of the tax benefits and high contribution limits. The plans’ administrators invest contributions to grow your child’s college nest egg. It’s the latter facet of this process that makes it so important for you to stay on top of your account(s) when you use a 529 plan to sock money away. As we saw in the early phase of the recent stock-market downturn, your account—and your child’s future education—could suffer greatly due to inaction.

Before 2008, holders of 529 plans could make changes to their accounts only once per year. This rule kept some parents, who might have used up their one change early on, locked in a downward spiral as the market crashed.

Congress eased rules so owners of 529 plans can make changes twice a year, but that change lasts only through 2010. Kalman Chany, who is the author of “Paying for College Without Going Broke,” says this is “too little, too late,” and we agree. So, we urge Congress to permit more changes to 529 portfolios.

However, it’s too bad that an act of Congress isn’t on the horizon for consumers who selected certain bond funds as the investment vehicle for their 529 plans and saw their accounts tank. Several states’ 529s invest in bond funds, which typically are low-risk investments. They’re not completely low-risk, however. Enter OppenheimerFunds. Oregon sued the asset management company over losses to its conservative 529 plan, because Oppenheimer invested in riskier bonds and derivatives. At press time, several other states that invested in Oppenheimer’s funds were reported to be close to reaching a settlement for reimbursement of what could be hundreds of millions of dollars in losses.

What makes the proposed settlements surprising, says Greg Brown, who is a mutual fund analyst with Morningstar, is that the states that are involved—Illinois, Maine, New Mexico and Texas—never filed suit. “Going the legal route would be very expensive, and you’re dealing with a ‘heart-strings’ case,” Brown says. Most of these states have dropped Oppenheimer. Unfortunately for residents of Nebraska, their state’s plan hasn’t. The Oppenheimer settlements, if they go through, could set a precedent regarding suits against other 529 plans that took on more risk than their marketing departments suggested.

529 plans that are invested in Putnam funds are also a concern to Morningstar. One of those is Ohio’s CollegeAdvantage. “Putnam has been plagued by stewardship issues since late 2007,” Brown says. The state upgraded the plan by adding non-Putnam options, by removing what plan administrators call the worst Putnam options and by lowering fees slightly. “However, the majority of the plan’s underlying holdings are still Putnam funds. Until Ohio does more house-cleaning, we’d avoid it,” Brown adds.

Of note is the announcement that was made June 29 that the Ohio Tuition Trust Authority selected BlackRock investment management firm to run a new 529 plan for the state. Brown believes that BlackRock would provide a significant step up in quality from Putnam.

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