This Hidden 529 Plan Trap Could Cost You Thousands of Dollars

Virginia Tech senior and resident advisor, David Dorsett, left, chats with fellow dorm resident and freshmen, Ross Cooper of Richmond, Virginia, in Lee Hall on the campus of Virginia Tech in Blacksburg, Va., Monday, Feb.22, 2010. (AP Photo/Don Petersen)
Don Petersen, AP

There are plenty of things college students do that they later regret -- and not all of them have to do with beer, frat parties, or sleeping through final exams.

Eventually, you'll be able to laugh about your stupid undergrad antics and reminisce fondly about first loves. But one regret can continue to haunt a person years -- even decades -- after graduation: student debt.

Till Debt Do You Part

A recent survey from the American Institute of CPAs found that 60 percent of college students who took out student loans to finance their educations regret that decision.

And while you as parents won't be able to stop Junior from pining after the wrong girl or partying on a school night once he goes off to college, you can help your offspring a avoid painful financial future in which student debt forces them to put off buying a home, saving for retirement, or even getting married.

Every penny you set aside for your child's education means one less penny they'll have hanging over their head for years (maybe decades) to come. And one great way to save for college is to use 529 plans. But within these plans lies a trap for the unwary.

All you have to do to avoid that trap is to choose direct-sold plans rather than advisor-sold 529 plans, and by doing so, you can add thousands to your college savings stash with very minimal effort.

The Costs of Advisor-Sold 529 Plans

529 plans carry the same benefits regardless of whether you use a financial professional to invest or you send money directly to the company managing the plan. By using a 529 plan rather than just a regular investment account, your savings grow on a tax-deferred basis, and your earnings are tax-free if you use the account proceeds for qualifying educational expenses.

But there's a big difference between direct-sold and advisor-sold plans in what you'll pay to get those benefits.

  • With advisor-sold plans, you'll often face a choice of either paying an up-front sales charge or paying higher annual expenses for the investments within the plan.

  • Direct-sold plans usually come with no sales charge and more reasonable expenses.

When you first consider those added fees, they may not seem like such a big deal. With a typical sales charge ranging from 3 percent to 5 percent and annual expenses in the 1-percent range, the dollar amount you'll pay in fees from your monthly contributions will often be small. For instance, if you set aside $250 each month for college savings, even a 5-percent charge amounts to just $12.50, and a 1-percentage-point increase in expenses comes to $2.50 per year.

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Over 18 years, though, those fees add up. On total contributions of $54,000, avoiding a 5-percent charge saves you $2,700. And by the end of your college-savings cycle, that 1-percent annual fee will be costing you more than $500 a year.

Add in lost investment returns on the fee money you pay -- returns that could easily double or triple your money over an 18-year span -- and the cost of getting advice is much higher than you might think.

The Smarter Alternative

Direct-sold plans require a bit more effort up front, as you have to work directly with the company managing the plan to make an investment. But many plans have easy-to-understand options that you can choose, including age-based portfolios that are tailored to how close your child is to going to college.

Some parents get nervous about going it alone in choosing from among the wide range of 529 plans available. Every state offers at least one plan, and most plans are open to investors nationwide, giving parents more than 50 choices to consider.

But plenty of resources are available for parents looking to make the best decision possible.

The College Savings Plans Network provides a wide range of information on 529 plans, and as an affiliate of the National Association of State Treasurers, its members include officials and staff members from state governments that help set up and oversee each state's 529 offerings.

Another useful resource is, a website operated by a private company that seeks to provide information both to individuals and to financial professionals about college savings.

Sophisticated-sounding strategies like 529 plans might seem too complex to use without professional help. But if you do your homework now, you can both feel more confident about the choices you make and save thousands in the process.