Pre-Paid College Plans vs College Saving (1 Viewer)

[Kirk Gunn]

In Maryland, there are 2 options available for parents to prepare for the high price of secondary education in the future.

Plan 1 - Prepay ~ 20k, and be guaranteed this covers all tuitions and fees for a 4 yr state university (i.e. - Univ of Maryland). The payments can be lump sum, 5 yr or 10 yr plans. If you desire to attend a non-state school, you will receive an average $ amount of current state school tuition.

Plan 2 - Put money in a TRowePrice savings planned sanctioned by the MD State Govt that will grow tax-free, then distributed tax-free. You can pick various funds to invest in, similar to a 401k. This is good for just about any college in the US. Return is dependant on the performance of these funds.

Both plans have similar tax benefits (2500.00/yr deduction on state taxes) and penalties (10% + you pay income tax on the benefit if your kid ditches school to become a gypsy).

Of course my wife likes Plan 1 because it's guaranteed to pay no matter what the market, but I like Plan 2 because of the school choice.

Anyone else facing such a quandry ?

 

[Dave Morton]

My wife and I are in the same spot. We decided to go with one of those 529 plans. It sounds like the TRowePrice plan that you describe. There is an option where you can put the money in all stocks for the first 6 years and then the plan will diversify into 70% stocks 30% bonds for the next five years, etc.. We liked this because it wasn't specified to any school. Also, if something were to happen where he didn't want to go to college, then we can take it out for something else, granted I think then you get penalized.

 

[Matt Stryker]

Are you serious? You can pay $20K total and your child gets 4 years at a state school with only housing and books to pay?
This is an awesome deal if the true initial cost is $20K; the cost of college in 2020 is going to be outrageous. Which states are offering such plans? In a state with a lot of good in-state schools (Such as North Carolina, California, or Virginia) this would be a great idea!

 

[Scott L]

Kirk- Just curious but is there a certain date you have to pay for plan #1 before your kids graduate HS, or can you just pay the $20k right after they graduate and they made they're decision to go to a MD university?

If my kids were in HS & liked MD colleges I think the $20k is the best option. Since MD has some great colleges, I say go with plan #1.

 

[Joseph S]

I vote for Plan 2 with school choice.
However, I'm all for hitting my limit with student loans at about $40,000 a year for Med School I'll be somewhere around $150,000 in semi-deferrable and low interest rate loans. Then again, I didn't have much of a choice.

 

[Todd Hochard]

Kirk- Just curious but is there a certain date you have to pay for plan #1 before your kids graduate HS, or can you just pay the $20k right after they graduate and they made they're decision to go to a MD university?

I'm curious about this too, since in FL, the amount you pay is dependent on the child's age at the time of enrollment. In other words, it's a LOT cheaper to pay into the program with a 1 year old child, than a 10 year old. If the kid is in his teens, forget about it.
My daughter is 8 months old, so I'm looking into a few of these right now. Not sure what to do. In fact, I'm not sure I want to give my children a full-on free ride through college at all. Call me cruel, but I know WAY WAY too many spoiled brats who wasted their parents' money, driving their new, paid-for-by-daddy cars, living in nice apartments, drinking their way to a 2.0 GPA (if that), only to tell their parents that they "NEED" to go back to graduate school to get a real job. Me, jaded- no.
Todd
P.S. I have no college degree, and the more people I meet with them, the less inclined I am to ever get one.

 

[Brian Perry]

This is an awesome deal if the true initial cost is $20K; the cost of college in 2020 is going to be outrageous.

The real analysis is whether the return on $20k invested today will be more or less than the cost of tuition in 20 years. If you take $20k and make 4% per year after taxes, you will end up with around $44k after 20 years. Will tuition at state schools be $11k per year by then? Who knows.

 

[Matt Stryker]

I think the wise plan would be to go for the in-state plan and then let your children know that if they wish to choose a private or out-of-state school, they can get student loans to cover the additional cost of their college experience.

I would venture that tuition should be well over $11,000 by 2020; it nearly doubled (for in-state students) over my 6 year stint at Georgia Tech. Private schools are going to be ridiculous by that point. And the idea of having a guarantee is pretty attractive; since this is state sponsored I would think the risk on the investment would be low to nil.

What would happen if you moved out of the state after investing the full amount? Would your child still get all of his tuition paid at the in-state university?

 

[Brian Perry]

Private schools are going to be ridiculous by that point.

I agree. I can't imagine how much some of the more expensive schools will be -- $60,000 per year?

 

[Kirk Gunn]

You can enter a child up through 9th grade into the Prepaid program, but applications expire in March '02.
They show figures that demonstrate a 235% increase in State Universities over the past 11 yrs. My payment (for a 2nd grader) would be 237.00/mo for 10 yrs.
As for comparing these plans with normal investement funds, the tax breaks seem pretty darn good. You get a tax break putting money in, your kid pays no taxes getting it out, plus a 235% ROI over 11 yrs.
For more details: http://www.collegesavingsmd.org
Thanks for all the comments !

 

[Ryan Peter]

What happens if you move out of state? Do you see yourself in Maryland in 18 years?

 

[Kirk Gunn]

They will determine a "Weighted Average" of what the tuition is at MD State schools, then give that to the beneficiary (child). This is applicable if she decides to go to either a private college in MD, or an out-of-state school. (If she decides not to go to school, I get the money, but minus a 10% penalty and taxes)

If my wife and I move out of MD, but my daughter decides to go to Univ of MD, it would still be 100% covered. You only have to be a resident when you first enroll.

And for some crazy reason I plan on being in MD, damn the high taxes ! It's not MD I love, it's Annapolis.

Annapolis - a drinking town with a sailing problem.

 

[Matt Stryker]

Annapolis - a drinking town with a sailing problem.

This sounds like my kinda town....how much do you pay in rent?
This is definitely something I will come back to when my wife and I have kids.

 

[Todd Hochard]

They show figures that demonstrate a 235% increase in State Universities over the past 11 yrs.

I can't possibly see how this can continue into the future unchecked. At some point, the people will revolt. That's over 15% per year! Not even a good stock fund can keep up with that.

A big part of the problem is that too many schools seem to be in the business of education. Note which is first.

Todd