|
| Disadvantages |
The disadvantages of section 529 college savings plans are as follows:
1) State tax advantages may be limited to the state's own section 529 college savings plan.
2) You are limited to the investment options offered by the plan.
3) Although the more aggressive investment options propose a greater potential return, they also include a greater potential risk. The principal you invest is at risk except for principal protection portfolios like money market accounts and guaranteed investments (proposed by a few states). You could lose money if the program's manager makes bad investment decisions or the stock market decreases.
If you contribute the money yourself, expenses and sales charges may be larger than what you'd pay. Some plans charge rather high sales loads of as much as 5% or 6% and management fees of as much as 2% a year.
The disadvantages of section 529 prepaid tuition plans are as follows:
1) Prepaid tuition plans are included into resources and influence greatly financial aid eligibility. Distributions from a prepaid tuition plan decrease need-based financial aid dollar for dollar. (The situation may change in the future.)
2) A return on investment offered by prepaid tuition plans may not be as successful as other investments.
3) Your investment in a prepaid tuition plan may be not enough to cover the full cost of private or out-of-state colleges. In most states the plans intend for in-state public colleges.
4) The admission period may be limited.
5) There may be penalties and/or decreasing in investment returns for non-qualified withdrawals or account annulment.
6) Many state prepaid tuition plans cover only tuition and fees, and do not provide expenses for room and board. So the family have to think additionally about these costs.
7) In many states the account owner or the beneficiary are required to be a state resident when the account is opened.
8) Maximum investments are much lower than for section 529 college savings plans.
9) There are some limits. Many prepaid tuition plans require 10 years include before the date of expected college entrance or high school graduation. Another less common limit is a requirement that the funds be used by the time the beneficiary reaches age 30.
|
|
