College savings plans finally back in favor with savers

Flows into section 529 college savings plans are positive once again with families contributing $2.4 billion nationwide during the final three months of 2011. That compares to net outflows of $354 million during the third quarter of last year. Assets in the plans are $144.4 billion, up from $134.6 billion the previous quarter and 4.5% above the $138.2 billion total from the end of 2010, according to Financial Research Corp., which analyzes data provided by the College Savings Foundation. With 529 plans, participants choose from certain investment portfolios, and the funds grow tax-free as long they are spent on higher education. “With assets up year over year, we're back on track,” said FRC analyst Paul Curley. “The net flows of $2.4 billion are a good sign for the industry.” Roger Michaud, chairman of the CSF, said “more people are saving and using 529s, and we are pleased to see that trend.” Prepaid college savings plans also are growing, reaching $20.4 billion in assets by the end of 2011, compared with $19.1 billion at the conclusion of 2010. That total includes assets in open prepaid plans and those that have closed to new accounts, according to Mr. Curley. Prepaid plans, offered by 10 states, allow for investors to pay for college tuition and fees at prices set today. The plans take investment risk off the shoulders of parents unsure about funding future college costs, a feature that is increasingly attractive to those worried about rising tuition rates and market volatility. Plans in eight states have been closed to new investors over the past 10 years as their managers have focused on meeting existing commitments. “In a down market, prepaid plans become very attractive,” said Andrea Feirstein, managing director of AKF Consulting Group, an adviser to state administrators of 529 plans. “Their growth probably reflects the current volatility.” The prepaid plans typically don't score very high with financial advisers. In fact, only about 11% of advisers use prepaid college savings plans for their clients, compared with 93% who use Section 529 college savings plans to help clients reach education goals, according to a Financial Research Corp. survey of 380 advisers. Nearly 10 million people are using 529 savings plans to save money for college, compared with 1.4 million using the prepaid plans, according to FRC.