ScholarShare 529 vs Vanguard 529: Comparing Top College Savings Plans

Future college expenses might keep you up at night, but choosing between California’s ScholarShare and Vanguard’s popular 529 savings plans could be the key to sleeping soundly again. As a parent or guardian, you’re likely aware of the ever-increasing costs of higher education. It’s a daunting prospect, but fear not – 529 plans offer a beacon of hope for those looking to secure their child’s academic future.

529 plans, named after the section of the Internal Revenue Code that created them, are tax-advantaged investment accounts designed specifically for education savings. These plans have become increasingly popular over the years, and for good reason. They offer a combination of tax benefits, flexibility, and potential for growth that can make a significant difference in your ability to fund your child’s education.

But here’s the rub: not all 529 plans are created equal. With numerous options available, including state-specific plans and those offered by major financial institutions, choosing the right one can feel like navigating a maze blindfolded. That’s why we’re going to dive deep into two heavyweight contenders in the 529 arena: California’s ScholarShare and Vanguard’s 529 plan.

ScholarShare 529: California’s Golden Ticket to College Savings

Let’s start our journey with ScholarShare, California’s official 529 plan. As the Golden State’s homegrown option, ScholarShare has some unique advantages that make it an attractive choice for many families.

First and foremost, ScholarShare offers a diverse array of investment options. Whether you’re a seasoned investor or a complete novice, you’ll find something that suits your risk tolerance and financial goals. The plan includes age-based portfolios that automatically adjust as your child grows older, becoming more conservative as college approaches. For those who prefer a hands-on approach, there are also static portfolios and even individual fund options.

When it comes to fees, ScholarShare is competitive. With annual asset-based fees ranging from 0.09% to 0.44%, depending on the investment option chosen, it’s on the lower end of the spectrum compared to many other 529 plans. This matters because lower fees mean more of your money goes towards your child’s education rather than lining someone else’s pockets.

Now, here’s where things get interesting for California residents. While 529 plans generally offer federal tax benefits, ScholarShare provides additional perks for those living in the Golden State. Contributions to the plan are tax-deductible on California state income tax returns, up to certain limits. This can result in significant savings, especially for high-income earners in a state known for its steep tax rates.

As for account minimums and contribution limits, ScholarShare keeps things accessible. You can open an account with as little as $25, and the maximum contribution limit is a whopping $529,000 per beneficiary. That’s more than enough to cover even the priciest Ivy League education!

Vanguard 529: The Low-Cost Leader in College Savings

Now, let’s shift our focus to Vanguard 529 Plans: Top Choices for College Savings. Vanguard, a name synonymous with low-cost investing, brings its signature approach to the 529 world.

Vanguard doesn’t actually offer its own 529 plan directly. Instead, it partners with several states to provide investment options within their 529 plans. The most popular of these is the Nevada-sponsored Vanguard 529 College Savings Plan, which is open to residents of any state.

Like ScholarShare, Vanguard’s 529 offerings include a range of investment options. You’ll find age-based portfolios that automatically rebalance over time, as well as individual portfolios for those who want more control. The key difference here is that all of these options are built using Vanguard’s renowned low-cost index funds.

Speaking of low costs, this is where Vanguard really shines. With total annual asset-based fees ranging from 0.14% to 0.16%, Vanguard’s 529 plan is one of the most affordable options out there. Over time, these low fees can translate into thousands of dollars in additional savings.

When it comes to tax advantages, Vanguard’s 529 plan offers the standard federal tax benefits. Earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses. However, unlike ScholarShare, there are no additional state tax benefits unless you’re a Nevada resident.

Vanguard’s account minimums and contribution limits are also investor-friendly. You can open an account with just $3,000, or $50 if you set up automatic monthly investments. The maximum contribution limit is $500,000 per beneficiary, slightly lower than ScholarShare but still more than adequate for most families.

Battle of the Titans: ScholarShare vs Vanguard 529 Performance

Now that we’ve covered the basics, let’s get down to the nitty-gritty: performance. After all, the whole point of investing is to grow your money, right?

Comparing the historical returns of ScholarShare and Vanguard’s 529 plans is a bit like comparing apples and oranges, given their different investment options. However, we can look at some general trends.

Both plans have performed well over the long term, particularly in their age-based portfolios. These portfolios, which automatically adjust their asset allocation as the beneficiary ages, have consistently delivered solid returns while managing risk appropriately.

For example, let’s consider a hypothetical scenario where two families invested $10,000 in each plan’s moderate age-based portfolio for a newborn child 18 years ago. By the time that child was ready for college, both accounts would likely have grown significantly, potentially doubling or even tripling in value, depending on market conditions.

However, it’s crucial to remember that past performance doesn’t guarantee future results. The stock market’s unpredictable nature means that returns can vary widely from year to year.

When we look at risk-adjusted performance metrics, both ScholarShare and Vanguard’s 529 plans have generally fared well. These metrics, such as the Sharpe ratio, measure how much return an investment provides compared to the level of risk it takes on. Both plans have demonstrated an ability to deliver solid returns without taking on excessive risk.

One area where Vanguard might have a slight edge is in the performance of its index-based portfolios. Vanguard’s expertise in index investing means that these portfolios often closely track their benchmarks while keeping costs low. This can be particularly beneficial in years when the market performs well.

However, ScholarShare’s actively managed options have the potential to outperform in certain market conditions, particularly during periods of market volatility. The trade-off, of course, is higher fees for these actively managed funds.

Speaking of fees, this is where the long-term impact becomes apparent. Vanguard’s rock-bottom fees mean that more of your investment returns stay in your pocket. Over an 18-year investment horizon, this fee difference could potentially add up to thousands of dollars in additional savings.

The Devil’s in the Details: Key Differences Between ScholarShare and Vanguard 529

Now that we’ve covered the broad strokes, let’s zoom in on some of the key differences between these two 529 powerhouses.

State-specific benefits are perhaps the most significant differentiator. If you’re a California resident, ScholarShare’s state tax deduction could be a game-changer. The ability to deduct up to $10,000 in contributions for married couples filing jointly (or $5,000 for single filers) from your state taxable income can result in substantial tax savings. Vanguard’s plan, while excellent in many respects, doesn’t offer any state-specific tax benefits unless you’re a Nevada resident.

When it comes to investment option diversity, both plans offer a solid range of choices. However, ScholarShare edges out Vanguard slightly in this department. While Vanguard focuses primarily on index-based options (which is great for many investors), ScholarShare offers a broader mix of both passive and actively managed funds. This could be appealing if you’re looking for more specialized investment strategies.

We’ve touched on fee structures already, but it’s worth reiterating: Vanguard is the clear winner when it comes to overall costs. Their fees are among the lowest in the industry, which can make a significant difference in your account balance over time. ScholarShare’s fees, while competitive, are generally higher, especially for their actively managed options.

In terms of ease of use and account management tools, both plans offer user-friendly online platforms and mobile apps. However, Vanguard’s interface is often praised for its simplicity and clarity. Their account management tools are straightforward and intuitive, making it easy for even novice investors to navigate.

Customer service is another area where both plans perform well, but with different strengths. ScholarShare offers more personalized support, with California-based representatives who are well-versed in the specifics of the state’s plan. Vanguard, on the other hand, is known for its extensive online resources and educational materials, which can be incredibly helpful for self-directed investors.

Making the Choice: ScholarShare or Vanguard 529?

So, how do you choose between these two excellent 529 plans? As with most financial decisions, the answer depends on your specific circumstances and priorities.

First, consider your state of residence. If you’re a California taxpayer, the state tax deduction offered by ScholarShare could be a significant factor in your decision. The potential tax savings might outweigh the slightly higher fees, especially if you’re in a high tax bracket.

Next, think about your investment preferences. If you’re a fan of index investing and want to keep costs as low as possible, Vanguard’s 529 plan might be the way to go. Their rock-bottom fees and straightforward investment options make it an excellent choice for cost-conscious investors.

On the other hand, if you prefer a wider range of investment options, including actively managed funds, ScholarShare might be more up your alley. Just be prepared to pay slightly higher fees for this additional flexibility.

Your comfort level with technology and self-directed investing should also factor into your decision. While both plans offer online management tools, Vanguard’s platform is particularly well-suited for those who are comfortable managing their investments independently. If you prefer more hands-on guidance, ScholarShare’s personalized customer service might be more appealing.

It’s also worth noting that you’re not limited to choosing just one plan. Some families opt to use both ScholarShare and Vanguard’s 529 plans strategically. For example, California residents might contribute enough to ScholarShare to max out their state tax deduction, then direct additional savings to Vanguard’s plan to take advantage of its lower fees.

The Final Verdict: Your Path to College Savings Success

As we wrap up our deep dive into ScholarShare and Vanguard’s 529 plans, let’s recap the key differences:

1. State-specific benefits: ScholarShare offers tax advantages for California residents, while Vanguard’s plan doesn’t provide state-specific perks unless you live in Nevada.

2. Investment options: Both offer a good range, but ScholarShare provides more diversity, including actively managed funds.

3. Fees: Vanguard is the clear winner here, with some of the lowest fees in the industry.

4. Ease of use: Both are user-friendly, but Vanguard’s platform is particularly praised for its simplicity.

5. Customer service: ScholarShare offers more personalized support, while Vanguard excels in online resources.

Remember, the “best” 529 plan is the one that aligns most closely with your personal financial goals and situation. Whether you choose ScholarShare, Vanguard, or a combination of both, the most important thing is that you’re taking steps to save for your child’s education.

It’s also crucial to review your 529 plan regularly. Your financial situation, goals, and the plans themselves can change over time. What works best for you today might not be the optimal choice five years down the road. Set a reminder to reassess your 529 strategy annually, or whenever there’s a significant change in your financial life.

In the end, saving for college is a marathon, not a sprint. By starting early, choosing a plan (or plans) that fits your needs, and consistently contributing over time, you’re giving your child an incredible gift: the opportunity for higher education without the burden of excessive student loan debt.

So, whether you go with ScholarShare, Vanguard, or another 529 plan entirely, pat yourself on the back. By even considering these options, you’re already ahead of the game in preparing for your child’s future. And who knows? With the right 529 plan in your corner, those sleepless nights worrying about college expenses might just become a thing of the past.

For more information on other 529 plan comparisons, check out our articles on Fidelity 529 vs Vanguard 529: Comparing Top College Savings Plans, Texas College Savings Plan vs Vanguard 529: Comparing Top Education Savings Options, and PA 529 vs Vanguard 529: Comparing College Savings Plans for Your Child’s Future. And if you’re interested in diving deeper into Vanguard’s offerings, don’t miss our Vanguard 529 Plan Review: Is This College Savings Option Right for You? and Vanguard 529 Portfolios: Optimizing Education Savings with Strategic Investment Options.

References:

1. Madrian, B. C., & Shea, D. F. (2001). The power of suggestion: Inertia in 401(k) participation and savings behavior. The Quarterly Journal of Economics, 116(4), 1149-1187.

2. Dynarski, S. (2004). Who benefits from the education saving incentives? Income, educational expectations and the value of the 529 and Coverdell. National Tax Journal, 57(2), 359-383.

3. Ma, J., Pender, M., & Welch, M. (2019). Education Pays 2019: The Benefits of Higher Education for Individuals and Society. College Board.

4. Thaler, R. H., & Benartzi, S. (2004). Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1), S164-S187.

5. U.S. Securities and Exchange Commission. (2018). An Introduction to 529 Plans. https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html

6. California State Treasurer. (2021). ScholarShare 529 College Savings Plan. https://www.scholarshare529.com/

7. Vanguard. (2021). The Vanguard 529 College Savings Plan. https://investor.vanguard.com/529-plan/

8. Morningstar. (2020). 529 College-Savings Plan Landscape. https://www.morningstar.com/articles/1006084/529-college-savings-plan-landscape-2020

9. Internal Revenue Service. (2021). 529 Plans: Questions and Answers. https://www.irs.gov/newsroom/529-plans-questions-and-answers

10. College Savings Plans Network. (2021). 529 Plan Data. https://www.collegesavings.org/529-plan-data/