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| College Savings Plans |
 Investment Options
Usually, each plan gives you a number of investment options that allow you to invest in various mutual fund portfolios. There are college savings plans that offer age-based mutual fund portfolios. When your child is young, the portfolio typically invests mostly in stock funds, which carry a higher risk, but higher return potential. When your child become older, the asset allocation becomes increasingly conservative as it gradually shifts to bond funds and other fixed-income funds.
A lot of states also offer non-age-based investment options, allowing you to select portfolios with conservative, moderate and aggressive asset allocations. There are also states which also offer investment options that allow you to invest in certificates of deposits whose interest rates are linked to an index that measures the average cost of college tuition.
Until recently, you could not change an investment option within a college savings plan once you selected that option. New contributions could be invested in various investment options. Now, nevertheless, the IRS allows you to change your investment options once every calendar year in a college savings plan.
Investment Risk
Keep in mind that investing in college savings plans does come with some risk. They don't lock in tuition prices, unlike prepaid tuition plans. Nor does the state back or guarantee the investments. There is also the risk with most college savings plan investment options that you may lose money or your investment may not grow enough to pay for college. For instance, if you select a plan option that invests in stock mutual funds, chances are that your invested funds' annual performance will mirror the trends of the stock market. In such a way, you may lose money during a declining market.
Fees, Charges and Expenses
All 529 plans have fees and expenses. Not only do these charges vary among 529 plans, but also they can range within a single 529 plan. A single college savings plan may offer more than one “class” of shares to investors, like mutual funds. Each class has different fees and expenses and they are often referred to as A, B or C classes, units or fee structures. You can review offering document to see if a particular college savings plan offers more than one class.
It is very significant to take fees and expenses into account when selecting a college savings plan. Somewhat larger fees and expenses can make a big difference in the value of your investment over time. Let's imagine you invest $10,000 in a college savings plan with a return of 8% before expenses. With a plan that had annual administration and operating expenses of 3.03%, after 18 years, you would end up with only $22,966.81. If the college savings plan had expenses of 0.65%, you would end up with $35,534 – a 35% difference!
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