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Categorized | Paying For College

College Savings – Understanding 529 Plans, Fees, and Expenses

If you are planning on saving for college you may want to consider a 529 college savings plan.  529 plans are tax-advantaged savings vehicles for future college or university costs. There are two varieties of 529 plans that are available: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia offer at least one type of 529 plans for parents, grandparents, prospective students and other savers.  In addition, many private colleges and universities sponsor pre-paid tuition plans which allow you to lock-in tuition rates and mitigate the risk of escalating tuition prices. Many broker-sold 529 plans offer more than one share class, with fees and expenses that can vary greatly.  The most common share classes for 529 plans are Class A, Class B and Class C shares:

Class A shares usually impose a front-end sales load. Front-end sales loads reduce the amount of your investment. By way of example, if you have $5,000 to invest in a college savings plan with a 5% front-end load, the $250 sales load you must pay is subtracted from your $5,000, and the remaining $4750 is invested in the college savings plan. Class A shares usually have a lower annual distribution fee and lower overall annual expenses than other 529 share classes. In addition, your front-end load may be reduced if you invest above certain threshold amounts – this is known as a breakpoint discount. These discounts do not apply to investments in Class B or Class C shares.

Class B shares typically do not have a front-end sales load. Instead, they may charge a fee when you withdraw money from an investment option, known as a deferred sales charge or “back-end load.” A common back-end load is the “contingent deferred sales charge” or “contingent deferred sales load” (also known as a “CDSC” or “CDSL”). The amount of this load will depend on your holding period and typically decreases to zero if you hold your investment for enough time. Class B shares typically impose a higher annual distribution fee and higher overall annual expenses than Class A shares. Class B shares usually convert automatically to Class A shares if you hold your shares for the required period of time.

If there is a sale of Class B shares within the first few years of purchasing Class B shares, there will likely be a contingent deferred sales charge or load added to the transaction in addition to higher annual fees and expenses, further reducing your investment returns.

Class C shares might have an annual distribution fee, other annual expenses, and either a front- or back-end sales load, so be sure to read the prospectus carefully.  It is important to note that the front- or back-end load for Class C shares is usually lower than for Class A or Class B shares. Class C shares typically impose a higher annual distribution fee and higher overall annual expenses than Class A shares, but, unlike Class B shares, will not convert to another class over time. If you are a long-term investor, Class C shares may be more costly than investing in Class A or Class B shares, so consider your likely timing of your need for the funds for college saving plan before deciding to purchase Class C shares.

Author Bio

Today’s guest article is provided by James Garfinkel. He is the founder and CEO of New Amsterdam Life and Director of the not-for-profit Juvenile Life Insurance Foundation.  James Garfinkel has been developing wealth planning advice and financial solutions for individuals and families for almost 30 years.

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