Prepaid College plan VS. 529 vest What say ye? (middle school, universities)

[dod236]

For us, it was the sense of security and peace of mind. We have two kids and I do admit it's costly, but as I mentioned, it's just the peace of mind. See the link below, other people discussed this a few months ago:

VA 529 Plan: Yes or No?

Originally Posted by midlifeman

I have a 3 year old in a 529 Vest Plan and I looked at it the other day and realized the market has done squat for the growth of this plan. Then I looked at the cost of education at UVA and VA tech, both which have increased by 10% this year.

Analysis:
Why am I bothering with a 529 vest plan? These tuition hikes are out of control so I am leaning toward the preapaid plan.

What are your thoughts gang? Why did you choose one over the other?

[midlifeman]

The only problem with the coverdell is that you can't deduct it on your VA state taxes, so I don't know why you would invest in it. You get a state tax deduction with the prepaid and vest plans and you can carry over any contributions that go beyond the limit of 4,000 per account. You don't want to throw that tax break away by using a coverdell.

I'm not sure you can gamble all your college planning with a vest plan. These plans tend to get more conservative as the child ages, so is that really investing in your future.....No it's a scared form of savings and your trying to time the market by being risky in the early years and conservative in the late years of a specific period in your childs history. If you want to beat 10% or even 7% cost in tuition do you really think your going to beat it with a conservative target fund?

What say ye?

[novaman]

I have one in college, one in high school, and one in middle school. After seeing the market take a big drop a few years back, I decided to convert my 2 younger kids' 529 plans to prepaid once the market came back. I figured I could afford it so why not have that peace of mind. I am still contributing to their 529 plans to cover future room, board, and other expenses

[midlifeman]

bump

[michgc]

You only get a Virginia state tax deduction for the 529 plan if you invest in the Virginia 529. If you invest in one of the many other states' 529 plans, you won't get a Virginia state tax deduction. Even without the state tax deduction, I prefer to control my investments on whatever I can. The investments in the 529 is limiting which is why I like investing the first $2000 in an ESA. I'm not sure what you mean by carrying over the contributions.

Yes, if you choose the age-based portfolios, they get more conservative over time. But 18 years is not that great of a time-window. And you are essentially forced in withdraw during the 4 years your child goes to college. If your child was enrolling in college over the past 3-4 years, you'd be in serious trouble even with their investments becoming more conservative over time. Pretty much everything took a serious beating.

I do think it would be hard to beat a 10% tuition increase in the stock market unless we're talking about the early 1990s and who knows when in the future? But we don't know that tuition will increase 10% or even 7% every year for the next number of years. With the state of the economy, maybe prices will hold steady or even go down? In which case, the prepaid will not be such a good deal.

The problem is none of us know what will happen in the future - whether the market will outperform the tuition increases or vice versa. With the prepaid you get a guarantee but it doesn't mean it will end up being the best deal. I think you just need to decide if the guaranteed tuition being paid for is worth it to you or not. Also you need to be pretty confident your child will go to a Virginia state school. I don't think it's worth it to do the prepaid if your child ends up going private or out of state. What if your child gets a partial scholarship to another school making that more attractive than a VA state school? What if you move out of Virginia? Lots of unknowns. That's what I don't like about the prepaid.

In the end, it's all a crapshoot. You have to do what you think is best with the information you know now.

Originally Posted by midlifeman

The only problem with the coverdell is that you can't deduct it on your VA state taxes, so I don't know why you would invest in it. You get a state tax deduction with the prepaid and vest plans and you can carry over any contributions that go beyond the limit of 4,000 per account. You don't want to throw that tax break away by using a coverdell.

I'm not sure you can gamble all your college planning with a vest plan. These plans tend to get more conservative as the child ages, so is that really investing in your future.....No it's a scared form of savings and your trying to time the market by being risky in the early years and conservative in the late years of a specific period in your childs history. If you want to beat 10% or even 7% cost in tuition do you really think your going to beat it with a conservative target fund?

What say ye?

[midlifeman]

I live in Virginia so it make sense for me to invest in the VA prepaid plan because of the tax deduction and the probability that my kids will go to a VA school. If they go out of state that's fine. Unlike the Coverdell, you can deduct from your taxes what you contribute. Let's say I sign up for one year of college prepaid tuition (roughly 11,000). The tax code says you can deduct up to 4,000 per account. So in my case I deduct 4,000 this year, 4,000 next, and the remaining 3,000 in year 3, thus the cary over.

Tuition has never gone down and is continuing to trend upwards. There is more predictablility with tuition going up then whatever the market may or may not do in a short term period...I.E. 15 years until my daughter graduates.

Prepaid will pay for private school and will pay the average in-state tuition towards and out of state tuition cost. Also, Scholarships are refundable. If your child gets a scholarship, cha ching....you get a refund for the amount of the scholarship or grant back from the prepaid plan.

[michgc]

Well, it sounds like you are pretty pleased with what the VA Prepaid plan offers. So I'm not sure what you are asking? There are risks with whatever plan you choose. The risk for the 529 is that you won't have enough money to pay for college. The risk for the VA prepaid plan is that you could possibily have done better on your own. Pick your poison.

Originally Posted by midlifeman

I live in Virginia so it make sense for me to invest in the VA prepaid plan because of the tax deduction and the probability that my kids will go to a VA school. If they go out of state that's fine. Unlike the Coverdell, you can deduct from your taxes what you contribute. Let's say I sign up for one year of college prepaid tuition (roughly 11,000). The tax code says you can deduct up to 4,000 per account. So in my case I deduct 4,000 this year, 4,000 next, and the remaining 3,000 in year 3, thus the cary over.

Tuition has never gone down and is continuing to trend upwards. There is more predictablility with tuition going up then whatever the market may or may not do in a short term period...I.E. 15 years until my daughter graduates.

Prepaid will pay for private school and will pay the average in-state tuition towards and out of state tuition cost. Also, Scholarships are refundable. If your child gets a scholarship, cha ching....you get a refund for the amount of the scholarship or grant back from the prepaid plan.

[midlifeman]

So I got to ask, how do you know you could do better on your own? What do you invest in that gives you the confidence that you can compete with 7-10% raises in tuition. Where do I sign up? I'm just giving you a hard time, but I'm curious about the thought process. I'm not saying you can't do it, maybe your the Warren Buffet type? ...but I am saying that I personally can't invest in the market and compete with these costs.

[michgc]

I don't think I can necessarily do better on my own. In fact, I just looked at what we've invested for my oldest daughter since she's been born. We have invested $2000 per year for 9 years since 2002 ($18,000). It is now worth about $22,000. I believe that is about a 4% return. So I'm not keeping up with any kind of 7% tuition increase, but probably doing better than I would have in an age-based 529 plan.

What mostly keeps me from doing a pre-paid plan is that we might not be living in Virginia in 10 years. If that's the case, then we'd be looking at out-of-state tuition for Virginia schools. Instead, we'd probably do a state school in whatever state we are living in. Then we'd have to do a transfer of the lower of: 1) the payments made on the contract plus interest at the composite reasonable rate of return or 2) the average in-state undergraduate tuition and mandatory fees at Virginia public schools for the same academic year the benefits are used.

The composite rate of return is what? I'm not sure, but it's probably low. It just doesn't seem like a great deal if you are going out of state, which I think there's a decent chance of in my family. My other main reason for not doing it is we don't have the lump sum to pay it now. We have three children, and during the last open period that would have meant a single payment of over $135,000! or very high monthly payments that we don't have.

Also, I just feel like the prepaid plan is too limiting even though it gives you outs for other scenarios than your kid going to a public school in Virginia. I think I'd feel the tie to it and would push my kid to go there even if it's not necessarily the best for her.

At this point, we are living off one income and are saving heavily for retirement. We expect to have higher income once I go back to work when the youngest is school-age. At that point we should be able to contribute more than $2000 per year per child. We also have a 15-year mortgage that will be paid off before child #1 goes off to school. So our house payments can go to her college.

Overall, I think everyone needs to figure out a plan that works for them to pay for their children's college (if they plan to do so). Whether it is the prepaid plan, the 529, or something else. The key is to have a plan.

Originally Posted by midlifeman

So I got to ask, how do you know you could do better on your own? What do you invest in that gives you the confidence that you can compete with 7-10% raises in tuition. Where do I sign up? I'm just giving you a hard time, but I'm curious about the thought process. I'm not saying you can't do it, maybe your the Warren Buffet type? ...but I am saying that I personally can't invest in the market and compete with these costs.

[ChristineVA]

Originally Posted by michgc

Overall, I think everyone needs to figure out a plan that works for them to pay for their children's college (if they plan to do so). Whether it is the prepaid plan, the 529, or something else. The key is to have a plan.

I am on the "pay as you go" plan.

When my daughter was born and for many years after, there were none of these plans available. Once I figured out there were, I had two kids, a new house and just getting started in my career. I couldn't have contributed a dime. Yes, I lost a few nights of sleep over it. By the time my oldest was in 9th grade, I *finally* started to get some extra money. But by then, it was just too late to really get going in any of these plans. Fortunately, both my husband and I have not been affected by the recession and we've cut back on doing anything overly fun or spending things on the house. I was able to pay for my DD's first year of college on a monthly tuition plan. So that was a relief. Of course, in doing that, I'm still unable to "save" and I've got #2 going to college in 2013.