I first want to make sure that it is clear that almost all regular 529 savings plans can be used for just about any private or public school in the nation. You can have a Nevada 529 and go to school in Virginia.

Next, there are many 529 plans that have great investments with very low expenses. Just one example is Utah’s 529 plan (UESP). It utilizes funds that cost as little as 10 bps (0.1%). The reason why mutual funds are good for the average investor is because funds allow a personal to be diversified. Instead of owning just a few companies such as “Disney” or “Phillip Morris”, you own hundreds if not thousands of companies through mutual funds, enabling you to properly diversify and allocate your funds. Unless you have several hundred thousands dollars to build a highly disciplined, highly structured portfolio with individual equities, mutual funds are generally the best way to go. A small mutual fund fee is nothing compared to the risk you would assume otherwise by just investing in a few stocks.

Second, it is difficult for an average person to get fixed income exposure without mutual funds. Unless you are a high net worth individual, you don’t have the capital to build a diversified bond portfolio.

When a parent only has approximately 18 years to save for his/her kids’ education, the main risk is diversity and controlling volatility in the portfolio. It is very difficult to achieve low volatility with just a few individual equities. And a few is all you would have in a Coverdell since the annual limits are so low. Plus, lets say you are making monthly contributions to a Coverdell, you would be paying a transaction charge for each buy trade. The only way you could be efficient with purchasing individual equities is if you just contributed the $2,000 in a lump sum. However, very few people can do a lump sum payment whether it is because of a financial reason or a lack of will power. But then we come back to the same issue in that $2,000 dollar with won’t buy individual equities efficiently.
annual payments
However, just how there are great stocks and bad stocks, there are great mutual funds and there are bad mutual funds.

To finish up, there are great funds and there are bad funds. It is important to do your home work in not only picking the right 529 plan, but picking the best investment options. A lot of 529 plans are starting to let you build your own custom portfolio using a basket of funds that they offer. Find the right plan that is offering great funds, and you can build an awesome, well performing, inexpensive, and well diversified 529 plan. In doing so, there is no way you can better save for college with a Coverdell or taxable account.