American families grappling with the cost of higher education may consider a 529 college savings plan to lessen the financial burden. But there are several things to weigh when picking a plan.

A 529 plan is an investment account offering tax-free growth, as long as the beneficiary uses the money for qualified education expenses, such as tuition, room and board, books and more.

Families may also spend a limited amount on private K-12 tuition, apprenticeships and student loans, depending on state rules.

While it makes sense to start by exploring home-state options, including tax breaks and other incentives, investors are free to shop beyond their resident 529 plan.

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“The tax benefit is certainly important,” said Rachel Biar, director of Nebraska’s NEST 529 Savings Plan and vice-chair of the College Savings Plans Network, an organization promoting the accounts. “But they should definitely look at all features of the plan.”

Currently, 34 states and the District of Columbia offer a write-off for 529 contributions as a state income tax deduction or credit, according to Morningstar. 

And seven states — Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania — provide tax parity, meaning investors can contribute to another state’s plan and still score a tax break in their home state. 

However, there is more to consider than state income-tax write-offs, financial experts say.

“I personally start with the investment merits of a 529 plan,” said certified financial planner Peter Palion, founder of Master Plan Advisory in East Norwich, New York. “And then I drill down to the tax benefits.”

Advisors may consider a 529 plan’s asset allocation, underlying investments, plan management and other factors. 

For example, many 529 plans offer investments that shift to less risky assets over time, such as from stocks to bonds, as the date for college approaches.

However, while some plan allocations have abrupt shifts, others may offer smaller, progressive changes occurring more often. The latter option may be less likely to “lock in losses” if rebalancing happens during a stock market downturn, Morningstar reports. 

It’s also important to assess each 529 plan’s fees, Palion said, which may include enrollment or application expenses, annual account maintenance, ongoing asset management costs and more. 

For example, let’s say someone invests $10,000 directly into a state plan and it earns 5% returns per year over 10 years.

While it may cost up to $138 for Louisiana’s 529 plan, they may spend $530 to $1,443 in fees for South Dakota’s plan, as of September 2021, according to Savingforcollege.com’s 529 fee study. 

Moreover, it’s typically cheaper to buy a 529 plan directly with a state, rather than through an advisor charging a commission, said Jim Shagawat, a CFP and partner advisor at AdvicePeriod in Paramus, New Jersey.

Another perk to consider: Some states won’t count a portion or all of their 529 plan assets for state financial aid eligibility. For example, New Jersey won’t include up to $25,000, Palion said.

“It’s very important to look at these questions on a very, very detailed and careful basis and not just make general assumptions,” he added.