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529 saving plans: no longer cool?

Net inflows into 529 saving plans have slowed as the economy remains weak. Many parents are looking at alternatives to the 529 saving plans.

By Margaret PriceCorrespondent / September 9, 2012

Students carried belongings to dorms during freshman move-in day, Aug. 16, at the University of Tennessee at Chattanooga. As inflows slow to 529 saving plans, parents are weighing alternatives for saving for college.

Dan Henry/Chattanooga Times Free Press/AP/File


New York

This fall, the Haubners send two kids off to college – and won't go broke. To pay the freight, they will use funds from the two 529 college savings plans they'd created years ago, as well as other savings and portions of their salaries.

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But the biggest contributor? "Apple," says Patricia Haubner, a publicist, who lives with her husband in Westchester County, N.Y. Years ago, they'd bought a small amount of the stock for their kids, watched it zoom up in price, and are now tapping some of those gains.

Even as many experts tout 529 savings plans as the best way to save for college, interest in them is cooling. Net inflows into the state-administered plans have slowed. Some parents have diverted resources to pay down debt. Others are gravitating toward other tools to save for tuition bills. With the costs of college sky-high and growing, 529 plans remain a great way to invest for a college education. But they're not the only game in town, and it makes sense to look at alternatives.

Brian Solik switched. The former stockbroker, a father of five in Toms River, N.J., stopped funding the three 529 plans he'd set up for his oldest kids in 2008 when the plans suffered large losses in the stock market's crash. Now, as an independent financial adviser and founder of Wealth Preservation Strategies, he prefers using the cash value of life insurance policies for college savings – a strategy he learned about after leaving the brokerage industry.

A big reason for the switch? Some life policies allow quite conservative investments, he says. "Since my oldest child will be going to college in four years, I don't want to incur any more investment losses to our family's college savings."

Assets in 529 college savings plans (which differ from 529 prepaid tuition plans) fell from a record high in the first quarter to $157.5 billion in the second quarter – a 0.5 percent decrease, according to Financial Research Corp. (FRC) in Boston. In the third quarter of 2011, net inflows were negative – more funds flowed out than flowed in – the first time that happened since the middle of the Great Recession. In the first half of this year, net inflows were nearly 7 percent below the same period last year and about 60 percent below The second quarter's $2.9 billion in net inflows (contributions minus withdrawals) were 12 percent lower than they were a year earlier, and down nearly half from their prerecession heyday in the mid-2000s.


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