You’re ready to start saving for college. You go to sign up for a Virginia 529 College Savings Plan, but are immediately faced with a decision about which plan is the right one for you.
Or maybe you have been pitched some expensive-looking mutual funds from a broker but you just aren’t sure that’s the right path for you.
No worries. Today we’re going to dive into the three Virginia 529 College Savings Plans so you can make an informed decision about what’s best for you and your family. In no particular order, let’s get started.
Virginia 529 Option #1: Invest529
The Invest529 is the option you can buy directly from VA529.com and does not involve any sales commissions. These funds generally have low expense ratios (low costs) and include a lot of index funds. If you don’t know how I feel about fees and investments expenses then you need to quickly read my post “Why Fees Matter.” Quick summary: low costs = significantly more money in your pocket over time - click here to find out how much.
Invest529: Target Date Funds
The Invest529 option makes it really easy for you with its broadly diversified target date funds. Select the fund that corresponds most closely with your child’s birthdate and the risk will be reduced over time as your child gets closer to college. For very young children the investments tend to have a higher volatility (more likely to experience significant swings up and down) in the hopes of getting a higher return. As your child gets older the fund will primarily invest in bonds and cash equivalent investments. While I’m am typically a bit wary of target date investments, for college savings I think they can be very helpful. Why do I think that? When it comes to college savings people sometimes make ...cognitive errors… when it comes to selecting an asset allocation. By this I mean people don’t realize how relatively soon their investments will need to be liquidated to pay for college. They frequently try to “catch-up” on missed savings with an overly aggressive portfolio. This can be a recipe for disaster. By using a target date fund you can help avoid this major error.
Invest529: Static Portfolios
For all my index-fund loving bogleheads out there who want to create their own portfolios, Invest529 does offer several static portfolios for your nerdy enjoyment. The static portfolios include a few asset allocation portfolios (unlike the target date funds, they do not reduce risk as time goes on), a U.S. stock index fund, a bond index fund, an international stock index fund and a Real Estate Investment Trust.
Invest529: FDIC Insured
If you are looking for a very low risk (in terms of losing money, debatable on how this account will fare vs. inflation) option for your 529 money VA529 offers an FDIC-insured option under the “static portfolios” section of the Invest529 program. I am breaking it out here because, unlike the other static portfolio, this account is similar to a bank savings account (hence the FDIC insurance). This may be a good choice for saving in the student’s senior year in high school and college years.
Virginia 529 Option #2: Prepaid 529
Prepaid 529 is a unique prepaid tuition program that allows you to buy semesters of school (at either a 4 year university or 2 year Virginia-state school) for students who are in the 9th grade or younger. (side note for the uber type-A: your child must be born to purchase tuition on their behalf. Their rule, not mine. That thought DEFINITELY did not cross my mind when I was pregnant...) For the very organized, you can start paying your future college tuition bills now.
Virginia Prepaid tuition allows you to lock in tuition costs today, make payments over time and essentially hedge your inflation risk. The Prepaid 529 program offers a variety of payment options, including a lump-sum payment option, monthly payments, or a combination of a down payment + monthly payments. How much will something like this run you? Currently (in 2018), a semester of tuition at a 4 year school for a child who is in kindergarten through 4th grade is $8,485. On top of that, Virginia Prepaid doesn’t cover room and board.
(Go ahead, grab that napkin and wipe up the wine you just spit onto your shirt. This is a judgment-free zone.)
Yes, prepaid is expensive.
However, it can make sense in the right situation - say you receive a large bonus and you just like the idea of having a portion of college paid for now. Or you pay off your car and have some extra monthly cash flow you would like to roll into a Prepaid tuition plan. In fact, you can actually roll money from your InVest account into a Prepaid account and pay for it that way. The catch here is that if your child does not attend a Virginia public institution the rate of return you receive on your money is quite low. We’re talking money market (cash) returns. What happens if your child wants to attend a private school in Virginia or a school out-of-state? VA529.com has broken it down very clearly so I will use the verbiage directly from their site: At private colleges and universities in Virginia, Prepaid529 pays the lesser of the following:
- Payments + actual rate of return on payments
- The highest Virginia public institution tuition and mandatory fees
At public or private colleges and universities outside Virginia, Prepaid529 pays the lesser of the following:
- Payments + reasonable rate of return* on payments
- The average Virginia public institution tuition and mandatory fees
Virginia 529 Option #3: College America
This is the traditional, broker-sold option. You can purchase American Funds in a 529 wrapper and have your financial advisor/broker pick and choose which funds you should buy (side note: brokers may call themselves a “financial advisor” because that’s not a regulated term, but let’s not kid ourselves. If they don’t have a serious certification like the CFP ®, CFA or a CPA with a PFS designation - caveat emptor.). You may or may not pay a load (commission) to purchase these funds.
Be sure to ask what loads and fees (such as 12b-1 fees) you can expect to be charged when purchasing OR selling these shares. There are a wide variety of share classes available with different fees and sales charges charged on each one. Not exactly consumer friendly. (Not sure why fees matter? Then read this!) These funds can be helpful if you have multiple accounts you are trying to coordinate an asset allocation across. Or if your brother-in-law is a broker and it saves you from purchasing an annuity...
Let’s wrap it up
You really have four options when it comes to VA529 plans; the DYI or with an advisor’s advice Invest529 investment funds, the Invest529 FDIC-insured account, the VA Prepaid Tuition plan or the broker-assisted CollegeAmerica. This isn’t an all-or-nothing choice. For example, you could pair a little Prepaid Tuition with an InVest account or CollegeAmerica Account. As it is an ongoing theme on this blog - if you’re working with a Financial Advisor (Broker) who is suggesting you use the CollegeAmerica program, get really clear on what share class they are putting you into and how that advisor will be paid. Different share classes have wildly different costs. You will want to know exactly what you are paying.
What VA529 Plans are we using?
All three of our kids have an Invest529 account, and we are using a little bit of Prepaid tuition for the older two kids. It’s not that we prefer the older two - though they are potty trained - it’s just that you can roll VA529 accounts from one beneficiary to the other within a family. Our thought is that we will potentially buy some more Prepaid for our oldest, and then if he doesn’t use it we will just roll it down to the younger two in the hopes that one of them uses it. We will be pushing hard for In-state schools given that college may or may not be worth what they’re charging for it currently.
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If you’re within a few years of sending your kids to college please (please, please) read “Talking To Your Student About Student Loan Debt” so you can both go into the college selection process with your eyes wide open.