BOSTON -- Of the parents already saving for their children's college educations, only one-third are using the tax-deferred investment plans specifically designed for college savings, according to a May survey sponsored by Fidelity Investments.
Although the survey also shows a 70% increase in knowledge of the tax-deferred education savings plan since last year, 83% of the parents are still not aware of the specific options available. Parents' options include prepaid tuition programs, custodial accounts, education IRAs and taxable accounts.
States' 529 plans, which can either be prepaid plans or investment plans, allow the investor's contributions to grow tax-deferred for all qualified expenses at colleges and universities anywhere in the United States.
Prepaid plans are controlled by the donor and are typically available only for tuition and fees and are guaranteed only at participating institutions, usually in-state. The annual contribution limits vary by state depending on state tuition rates.
Investment plan accounts are also controlled by donors but can be used for qualified higher education expenses at any post-secondary school in the United States. The annual contribution limit is $50,000.
More than 30 states have introduced 529 plans. New Hampshire, which was one of the first to offer the plans, has opened its UNIQUE College Investment Plan, which is managed by Fidelity, to residents of all states (Pensions & Investments, Sept. 7, 1998).
Prepaid plans are designed to keep pace with college inflation and the investment plans provide the opportunity for market returns and allow contributions, according to Fidelity.
"Parents should look at their in-state programs and compare it with UNIQUE," said Abram Claude, vice president of business development at Fidelity. "Depending on the type of plan they desire, they can make a decision on where they want to invest because some want a more aggressive plan than others."
Assets in the UNIQUE plan are invested in Fidelity mutual funds. The funds chosen vary depending on participants' ages, which are broken down into eight categories.
The most aggressive segment is Portfolio 2018, for beneficiaries born between 1991 and 2001, consists of 78% domestic equities, 10% international equities and 12% high-yield bonds. The College Portfolio, for beneficiaries born in 1980 or earlier, comprises 20% domestic equities, 40% U.S. investment-grade fixed-income and 40% short-term bond and money market funds.
Because the plan has been available for less than a year, Fidelity would not say how much UNIQUE money it manages, nor would it disclose how much 529 money it manages, except to say that the response has been positive nationwide.
The UNIQUE plan is a designated part of Fidelity's 529 plan business.
If current trends continue, the average cost for a child entering college in 18 years may be more than $80,000 for a four-year public institution and upward of $200,000 for a four-year private institution for four years.
Recent statistics from the College Board show that college tuition and fees rose by 4% for four-year public institutions and 5% for four-year private institutions over the past year.
