When Nick and Tara Poto arrived home with their newborn three years ago, the Glen Rock, N.J., couple promptly opened a 529 college-savings plan. Then they checked with their accountant, who asked that they think twice before contributing another dime. “He convinced us we should be thinking future forward,” says Tara, a social-media and marketing executive. “We don’t know what college will look like in 15 years. Maybe there is a better way to save.”
Over the past two decades, the 529 has been the most popular way to save for college, with a record $258 billion now in more than 12 million accounts. Contributions grow tax-free and may reduce your state income tax. But upheaval in higher education, combined with the rigidity of the 529, has led some parents and advisers to consider other options. “These are no longer a no-brainer,” says Wes Brown, a wealth adviser at Rather & Kittrell in Knoxville, Tenn.
The first question: Do you know what you’re saving for? While the cost of brick-and-mortar colleges keeps rising, the emergence of online courses at low or even no cost undercuts the assumption on which the 529 was built. If Internet studies qualify for the 529 but are largely free, why lock away a small fortune now that can be applied penalty-free only to pay for traditional school? Such questions are beginning to filter through the financial-planning community, and some advisers are exercising caution. “It’s hard to look 18 years into the future and speak about absolutes,” explains David Mullins, a wealth adviser in Richlands, Va. “There are all kinds of college-funding options out there.”
Doubts have dogged 529 plans for some time. Most Americans should be focused on their retirement accounts, says Mullins. After all, there are no grants, scholarships or loans aimed at helping you live well in your 80s. And stocks, which are where most 529s are invested, make a volatile choice for an account with a shortish horizon. Education Policy Center, a nonpartisan think tank, has concluded that a family investing $1,000 a year in a 529 plan for 18 years could have funded four years at a public university for a student entering college in 1997. The same regimen would not have covered even one year for a student starting in 2008.
The Potos’ adviser prefers socking away college money through the Uniform Gifts to Minors Act (UGMA), which brings a tax deduction on the first $1,000 and a reduced tax rate on the next $1,000. This money can put a dent into financial-aid awards when kids reach 18 and the money becomes theirs. But like the Uniform Transfers to Minors Act (UTMA), it gives you more investment options and does not necessarily need to be spent on education.
Brown, the Knoxville wealth adviser, likes 529 plans but only in small doses. He suggests that families with more than one child keep only one account and save only half the expected cost of college there. He would save the rest in a Roth IRA, where after-tax money grows tax-free. Early-withdrawal penalties are waived if the money goes toward education.
Certainly, saving nothing is a bigger problem than saving too much. The average 529 contains just $20,934, according to the College Savings Plans Network (CSPN). “No matter what college looks like in the future, people will have to pay something,” says CSPN chair Betty Lochner. Her organization will push for changes in eligible expenses in 529s, she says. For example, a bill is currently before Congress that seeks to make clear that computers are a legitimate 529 expense.
Such reforms may not come fast enough. The student debt burden, now at $1.3 trillion, has become a potent rallying cry for Democratic presidential candidate Bernie Sanders. President Obama has proposed that most students get two free years at a community college. Some states, like Tennessee, already offer that deal to residents. Others may follow.
In the meantime, young couples should look carefully at options before they set aside cash for college. A fully loaded 529 could be trapped money.
This appears in the October 05, 2015 issue of TIME.