Carrie Schwab Pomerantz

Dear Carrie: I opened a 529 account for my daughter two years ago. She's now 14, so we have four years before she starts college. The returns have been dismal, and I'm considering stopping my contributions. What do you suggest? Is this a good idea? --A Reader

Dear Reader: With the cost of a college education soaring, I can understand your concern. In fact, according to Education Secretary Arne Duncan, 3 out of 4 Americans think college is no longer affordable. Add to that the estimate from the College Board that 2011-12 costs for living and studying at the average in-state public university are up by 6 percent -- and will keep going up at least that much annually -- and students with your daughter's timeline could face a cost of $125,600 for four years at an in-state public school. A private university could easily be double that!

While rising costs are stimulating a lot of good national debate, some universities introducing programs to help a broader range of students, but there's no uniform solution in sight. Your smartest move is to keep saving. And to my mind, a 529 is still one of the most effective ways to do it. So before you make any changes, here are some things to think about.

CONSIDER THE TAX ADVANTAGES

529 plans have distinct advantages tax-wise. Because potential earnings grow tax-deferred, your money has a chance to grow faster. On top of that, withdrawals are tax-free as long as you use the money to pay for qualified education expenses, which typically include tuition, books, school supplies, and room and board.

There are other ways to save, of course. But a savings account, for instance, would have negligible returns with today's low interest rates, and a brokerage or custodial account has the same investment risk with no tax advantages. A 529 stacks up pretty well by comparison.

REVIEW HOW THE MONEY'S INVESTED

When it comes to returns, it's not really a question of whether a 529 account is an effective way to save but rather how the money is invested.

When you opened the 529 for your daughter, you most likely had to choose an investment portfolio. Generally, a plan offers a choice between a static portfolio and an age-based portfolio. With a static portfolio, the asset allocation stays the same until you make a change, which you can generally do twice per calendar year. With an age-based portfolio, the fund manager adjusts the asset allocation from aggressive to conservative as your child nears college age.


Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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