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Tips on winning a scholarship

Three award winners and two grant experts offer advice for improving the chances of nabbing more tuition help.

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5 top-rated 529 Plans

If you won’t get a significant tax benefit — or any benefit at all — from investing in your own state’s 529, it pays to shop nationally for a low-cost, high-performance 529.

Here are five plans, in alphabetical order, that get high marks from both Morningstar and Savingforcollege.com.

Alaska | T. Rowe Price College Savings Plan. T. Rowe Price manages this comparatively low-cost fund that gets five stars and a nod for its solid investments from Morningstar. Plus, thanks to one unusual perk, you’re eligible for in-state tuition prices at the University of Alaska up to the amount you have in the 529.

Nevada | 529 College Savings Plan. Savingforcollege.com gives this Vanguard-managed plan its top 5-cap rating.

Several of its investment options get a 5-star rating from Morningstar, like the Total Stock Market Index fund, the biggest and cheapest passive investment option around.

New York | New York’s 529 College Savings Program. This 529 gets top ratings from both Morningstar and Savingforcollege.com.

The program is jointly run by Vanguard and Upromise, which makes it easy for parents (and other relatives) to have shopping rebates credited to a college savings account.

Related: What’s the best 529 savings plan for you?

Utah | Utah Educational Savings Plan. Savingforcollege.com gives Utah its highest 5-cap rating, and Morningstar gives top 5-star ratings to Utah’s age-based options.

Utah’s Vanguard-run funds have some of the lowest costs in the business. Utah also offers an FDIC-insured option for absolute safety.

Virginia | CollegeAmerica. It’s cheaper to invest directly in low-cost plans like Alaska’s, Nevada’s and Utah’s, which don’t charge commissions and have much lower expense ratios. But if you want to use a broker or adviser, this is one of the better choices.

Savingforcollege.com gives this program, which is run by American Funds, 4.5 caps for out-of-staters. And Morningstar gives several of its investment options its top 5-star rating.

 

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What is the best 529 savings plan for you?

529s are just like other investments; research has shown that low-cost index funds generally end up providing higher returns to investors than funds that spend money on managers who try to pick and choose among stocks.

Opting for passive fund 529s can save as much as 0.85% in expenses, says Savingforcollege.com founder Joe Hurley.

But which of the many low-cost funds should you choose?

It depends on your state. If you live in one of the three states — Indiana, Utah, or Vermont — that offers tax credits, it pays to stay in state. You can get significant rebates on your 529 investments.

For instance, an Indiana couple who earns $100,000 and invests $5,000 in one of their state’s 529 plans, would save $1,040 on their state taxes, according to Morningstar.

Another 27 states allow residents who invest in their home state’s 529 to deduct at least some of their contributions.

Check this Morningstar report to see whether sticking with one of your state’s plans offers significant tax benefits. For instance, an Iowa couple earning $100,000 who contributes $5,000 a year to their state’s 529 would get a reduction in their state tax bill of $449. But South Dakota residents would do well to shop for an out-of-state 529; the same couple would only get $40 back on their taxes.

Also check to see if your state’s plan has gotten poor ratings, like some of South Dakota’s 529 investment options have from Morningstar.

An additional five states — Arizona, Kansas, Maine, Missouri, and Pennsylvania — offer tax parity, which means residents get tax breaks for investing in any college savings plan in the nation.

See what kind of college savings tax breaks your state offers its residents:

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What’s the best way for you to save for college?

To help you choose the best college savings option, here’s how each plan stacks up in the categories that matter most.

529 COLLEGE SAVINGS PLAN

Maximum contribution:

Annual: Typically, none. But if you contribute more than $14,000 in any given year, you’ll trigger gift taxes.

Lifetime: As much as $300,000 in many plans.

Tax treatment:

Federal: Tax-deferred growth, tax-free withdrawals for college expenses.

State: Many states provide tax benefits to residents using their plan.

Financial aid impact: Maximum of 5.64% of value will count against you.

Restrictions on withdrawal and spending: Withdrawals must cover qualified higher education expenses.

Potential problems: Limited investment options. Some states funds have comparatively high expense ratios.

529 PREPAID TUITION PLAN

Maximum contribution:

Annual: Typically, none. But if you contribute more than $14,000 in any given year, you’ll trigger gift taxes.

Lifetime: Up to $220,000 in some plans.

Tax treatment:

Federal: Tax-deferred growth, tax-free withdrawals for tuition.

State: Many states provide tax benefits to residents using their plan.

Financial aid impact: Maximum of 5.64% of value will count against you.

Restrictions on withdrawal and spending: Withdrawals only cover tuition.

Potential problems: Someplans are facing financial difficulties and may not have the funds to meet their obligations.

Most prepaid tuition plans require either owner or beneficiary of plan to be a state resident.

PERMANENT LIFE INSURANCE

Maximum contribution: None.

Tax treatment:

Federal: Tax-free access to the cash value of your policy.

Financial aid impact: These assets are not counted against you in financial aid.

Restrictions on withdrawal and spending: None.

Potential problems: High fees; lose money if withdrawals are made within the first few years.

ROTH IRA

Maximum contribution:

Annual: $5,500.

Lifetime: Depends on income.

Tax treatment:

Federal: Tax-deferred growth, and tax-free withdrawal of contributions if used for college. Earnings can be withdrawn tax-free after you turn 59 1/2.

Financial aid impact: These assets are not counted against you in financial aid.

Restrictions on withdrawal and spending: None (10% early withdrawal penalty waived for qualified higher education expenses).

Potential problems: Earnings are subject to income tax and withdrawals can impact future financial aid eligibility.

NEXT: What’s the best 529 savings plan for you

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