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How We're Saving for College

Morningstar experts discuss how they're taking on one of the biggest financial challenges families face today.

Adam Zoll, 06/27/2014

For some of us at Morningstar, working here means occasionally fielding questions from friends and family about our own thoughts on investing. Questions about where the market is headed are among the most common, with inquiries about what we're investing in being high on the list, as well.

For those of us with children, how we plan to pay for college is another easy conversation-starter. As any parent can tell you, while watching helplessly as college costs continue their steep rise, it's a daunting task no matter if your child is a newborn or old enough to drive.

With this in mind we asked several of Morningstar's in-house financial experts how they plan to take on the high costs of college for their own families. All said they use 529 college-savings plans to meet at least part of this financial challenge, though not all have had the same experiences or rationale.

Staying Close to Home
Elizabeth Collins, Morningstar's director of equity research, chose the Bronze-rated Illinois Bright Start College Savings Plan for her infant son. "I wanted to stay in-state because of the tax implications," she says. Illinois, where Morningstar has its headquarters, has one of the more generous policies for 529 state income tax deduction. State residents may deduct up to $10,000 apiece ($20,000 for joint filers) per year for contributing to a state 529 plan. And with Illinois' state income tax rate currently standing at 5%, a potential contribution of $20,000 for parents filing jointly means a $1,000 state income tax deduction.

Michael Holt, Morningstar's global head of equity and corporate credit research, says his family also uses the Illinois 529 plan as well as keeps some investments outside it. "Our primary vehicle is the 529 plan because the tax advantages are attractive," says the father of two, ages 4 and 1. "We spread our contributions (time diversification) and avoid attempts to time the market due to our long-term time horizon. We also put some additional money in stocks with durable competitive advantages (economic moats in Morningstar terms) that we plan to hold for 10-plus years."

Some of those surveyed are using 529 plans from other states. One fund analyst says she and her husband chose New York's 529 plan for their older son, age 11, because at the time they were living in a state that did not offer an income tax deduction for 529 contributions. They went with New York's plan, currently rated Bronze by Morningstar analysts, because of its well-established program and low-cost investments, she says. For their younger son, age 9, they chose Utah's Gold-rated 529 plan. Both sons' college-savings accounts are invested in Vanguard funds, she adds.

"We save several hundred dollars in each account every month through auto deposit and have done so through thick and thin, financially speaking, because we assume/fear that we won't be eligible for any financial aid when the time comes," she says.

Morningstar senior fund analyst Eric Jacobson says he also uses Utah's 529 plan for his two children while keeping some assets earmarked for college outside the plan in order to maintain flexibility. He says he chose Utah's plan because, at the time, it was among the few that offered low-priced Vanguard funds and flexibility in terms of who can use the 529 assets in case the beneficiary doesn't attend college.

Adam Zoll is an assistant site editor with Morningstar.com


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