College Savings: Follow the Obamas?

Rocky Granahan, a senior vice president at Oppenheimer Funds, said that the plans that Oppenheimer manages in five states -- Illinois, New Mexico, Nebraska, Oregon, and Texas -- have seen declines in the dollar amounts that people are contributing to 529 plans but increases in the number of 529 accounts opened.

Families crunched by the recession may have "a little less to save," Granahan said, but "the good news is that families are still making savings for college a priority."

Vanguard, which manages funds in Colorado, Iowa, Nevada, Missouri, New York and Pennsylvania, said that big, one-time contributions to 529 plans have declined while scheduled contributions -- like those made on a monthly basis -- have remained steady.

Tips on Participating in a 529 College Savings Plans

Hurley advises that no matter how nervous the stock market makes you, there are ways to manipulate your 529 to your advantage.

While specifics of 529 plans vary from state to state, because U.S. citizens can enroll in a plan in any state even if they do not live there, Hurley suggests finding an age-based plan, like the Obamas did.

"The aged-based option means you won't have to make as many decisions in terms of where the investment goes," said Hurley. "The plan's investments become more conservative as your child gets older."

Hurley said that most plans offer a choice of where your money is invested. Those who wish to be as conservative as possible with their money should look for plans that invest in money markets; whereas other choices may include multiple fund portfolios or individual mutual funds.

Shopping around to other state's plans and comparing the investment performances from plan to plan is another way to ensure you're investing wisely, said Hurley.

"The type of investment the plan uses -- whether it is index funds or actively managed funds or if the company hires outside managers to handle the pot of money -- all affects the performance," said Hurley. "Fees and expenses of applying also vary from state to state."

Hurley said that in 2008, Florida's 529 plan was rated the top in performance because it used separately managed accounts with hired money managers.

If you're strapped for cash and need to withdraw money from your 529 plan for something other than educational purposes -- like Lundberg is considering doing -- you could face a stiff penalty: federal income taxes on the earnings on your 529 investment plus another 10 percent tax penalty.

If you've lost money on your 529 plan, however, it's a different story. You can withdraw your money tax-free. In some cases, you may even be able to use the loss as a tax deduction.

What's a Pre-Paid 529?

Those unwilling to roll the dice on the stock market may be interested in pre-paid 529 plans.

A pre-paid plan locks in your tuition cost provided that your child goes to the in-state, public school, according to Hurley.

"You purchase a contract and the plan then becomes obligated to pay for the future tuition instead of you," he said.

"So, if tuition goes up, that is the plan's problem, not yours," added Hurley.

Most pre-paid plans do charge a premium, warns Hurley, to cover the inevitable increase in college tuition from the time the contract is purchased to when the child actually enrolls in a university.

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