Saving for College- Prepaid or 529?

Discussion in 'After Hours Lounge (Off Topic)' started by Todd Hochard, Aug 12, 2003.

  1. Todd Hochard

    Todd Hochard Cinematographer

    Joined:
    Jan 24, 1999
    Messages:
    2,312
    Likes Received:
    0
    All,

    I've got a two year old, as well as a little guy to arrive in December. My wife and I have recently been discussing options for saving for college.

    One of the options is FL Prepaid. Basically, you pay the tuition at today's rates, and they are guaranteed full coverage upon entry. You can do one lump sum, 5-year plan, or pay monthly until they go to college. Of these options, I'd tend toward the lump sum (about $8000), even though I'd have to scrape some from an underperforming Roth IRA of mine.
    Alternately, there are any number of 529 plans (such as the one from my TDWaterhouse broker) that we could contribute to. This increases flexibility, but given the cold, hard dose of reality delivered by the market in the past few years, it gives me pause. THEORETICALLY, rate of return could be higher (with better stock market returns) than the Prepaid (prepaid assumes a return of 6.5% or so, I think).
    Additionally, I must consider the possibility of scholarships. My 2yo is exceptionally sharp (toot, toot![​IMG] ), so should I slightly hedge my bets in this area??

    Keep in mind, I am a man of modest means, the sole breadwinner on a modest (mid-five-figure) income. Paying for this will mean fewer toys (for everyone) and fewer vacations over the next few years. I do feel that it's important, though, to start soon. One of those "short-term sacrifice, long-term gain" kind of things.

    Any thoughts on this from parents and/or financial planners out there?

    Todd
     
  2. Brandon_T

    Brandon_T Screenwriter

    Joined:
    Oct 3, 2000
    Messages:
    1,903
    Likes Received:
    1
     
  3. JustinCleveland

    JustinCleveland Cinematographer

    Joined:
    Dec 23, 2002
    Messages:
    2,059
    Likes Received:
    0
    Location:
    Madison, WI
    Real Name:
    Justin Cleveland
    Kids are young, they won't miss the toys or the vacations...

    Do it now, don't be in my boat (paying for a hundred thousand dollar education on my own).

    Hopefully I can teach Public Speaking in Grad school... that would help defray my costs.
     
  4. Leila Dougan

    Leila Dougan Screenwriter

    Joined:
    Mar 27, 2002
    Messages:
    1,352
    Likes Received:
    0
     
  5. Edwin_C

    Edwin_C Stunt Coordinator

    Joined:
    Jul 21, 2003
    Messages:
    113
    Likes Received:
    0
    It's good to plan out things early, but you don't need to this early. As the years go on your salary will increase. Take in all factors. Maybe you're one that likes to be better prepared for the future, but I don't see the point here.

    2 things you need to understand.
    1. The government will lend and give you money on a need basis when it comes to that time. This isn't something that's done by hard work, like scholarships, rather it's done for whoever needs it.
    2. I'm not sure if doing this would obligate your child to go to a specific school, but give your child a choice. If you don't want to give them a choice, then go with the school you or your wife graduated from. Practically all 4-year institutions will give the child of an alumni 50% off for tuition.

    Just save a little cash here and there and you should be fine. The only thing i'd worry about if I were you is the fact that if both your children go to college, then there will be 1 year where you have to pay 2 tuitions.

     
  6. Todd Hochard

    Todd Hochard Cinematographer

    Joined:
    Jan 24, 1999
    Messages:
    2,312
    Likes Received:
    0
     
  7. Joe Szott

    Joe Szott Screenwriter

    Joined:
    Feb 22, 2002
    Messages:
    1,962
    Likes Received:
    0
    Todd,

    We just looked at all this and went for the 529 plan for both our children. There are a few benefits that make it MUCH more attractive:

    * Your child can use it for any educational needs, not just tutition. Rent, Cars, etc. can all be covered under a 529 plan.

    * It continues almost indefinitely. What if Jr. spends 4 years bumming around Europe, then suddenly wants to be a lawyer? The 529 is still there growing all the time.

    * It is transferrable. Let's say your 2 yr old starts an internet business and doens't care to go to college. Then when child #2 goes to college and chews through his 529, you just transfer the older boy's 529 to the younger.

    * If they don't use up all the money, the 529 plan just sits there growing indefintely. Heck, they can save it and pass it on to their kids if you want. 529s are trusts, they can switch owners and beneficiaries many times during its lifespan.

    For the reasons listed above, basic flexibility. By prepaying you are locking your child into going to ONLY that one school at that specified time. What if your child can play the piano like Mozart and wants to go to Juliard? What do you tell him: sorry, but you have to go to Florida State? You never know what path they will choose, try to give them the flexibilties to do what they want to succeed.

    529s can go down in value, but nothing is a sure thing. Florida State could go bankrupt in 10 yrs and then *poof* your money is gone for good. Unlikely, but who in the early 1980s thought that S&Ls were unstable investments?

    529 is the way to go if you want to have the broadest coverage possible.
     
  8. Brian Perry

    Brian Perry Cinematographer

    Joined:
    May 6, 1999
    Messages:
    2,807
    Likes Received:
    0
    I agree with Joe. Go with 529 and avoid the prepaid plans like the plague. Some states have already had to scale back or abandon the prepaid plans since they weren't able to get their investments to match the rising costs. The way I look at it, either the market will outperform the rise in tuition (in which case I'll wish I had been in the market/529), or the market will underperform the rise in tuition (in which case the system will collapse and you won't get the promised benefit).
     
  9. Holadem

    Holadem Lead Actor

    Joined:
    Nov 4, 2000
    Messages:
    8,967
    Likes Received:
    0
     
  10. mark alan

    mark alan Supporting Actor

    Joined:
    Nov 19, 2002
    Messages:
    620
    Likes Received:
    0
    Don't count on the prepaid plans to work better than the savings plans. They only work if the invested funds do better than the increase in college tuition. If they do, then you would do better with a 529 plan, because that excess becomes yours. If they don't, then expect to be hit with a premium. She this quote regarding PA's program.
     
  11. Seth--L

    Seth--L Screenwriter

    Joined:
    Jun 22, 2003
    Messages:
    1,344
    Likes Received:
    0


    If the kid is that good, they'll want to go to Curtis, where tuition is actually free, and all piano students get their own Steinway while there.
     
  12. Leila Dougan

    Leila Dougan Screenwriter

    Joined:
    Mar 27, 2002
    Messages:
    1,352
    Likes Received:
    0
    Also, I'm not sure how your state works but in my state it works like this: You prepay tuition based on the current rates and you've guaranteed all costs are covered when the child enters college. But, if the child decides to go to some other school, you get your money back plus more. I'm not sure, though, if "more" is interest only, or the future tuition rate of the school. I'm pretty sure it's the latter, but I could be wrong. This eliminates the problem of Johnny wanting to go somewhere other than the local state university.

    My parents set up a trust fund with lots of stocks and bonds that gradually matured over a period of several years. . starting when I turned 16 and the last one when I turned 23. I used the money for all my educational expenses that weren't covered by my scholarship (car, housing, books, etc). When the last one matured, I was well done with school and just pulled the money out. I could have also transfered it to my brother who's started college this fall, but he didn't need it (wasn't much money anyway).
     
  13. Todd Hochard

    Todd Hochard Cinematographer

    Joined:
    Jan 24, 1999
    Messages:
    2,312
    Likes Received:
    0
     
  14. Seth--L

    Seth--L Screenwriter

    Joined:
    Jun 22, 2003
    Messages:
    1,344
    Likes Received:
    0


    They're the largest unchecked industry in the United States.
     
  15. DaveF

    DaveF Moderator
    Moderator

    Joined:
    Mar 4, 2001
    Messages:
    17,640
    Likes Received:
    1,437
    Location:
    One Loudoun, Ashburn, VA
    Real Name:
    David Fischer
    Todd - I don't know anything about the FL Prepaid plan, but a rule of thumb I've come by is that "pay us now for a service you won't use for 18 years" plan is a bad for the purchaser.

    If it locks your child into a specific school, or even into Florida, then it doesn't sound like a great long-term plan. You don't know where you child will be in 18 years. If he's "toot toot" smart [​IMG] maybe he will attend MIT, CalTech, or Rose-Hulman (my alma mater) rather than UCF. Or maybe your kid joins ROTC and gets college for free (some really smart friends did this.)
     
  16. mark alan

    mark alan Supporting Actor

    Joined:
    Nov 19, 2002
    Messages:
    620
    Likes Received:
    0
    look at it this way.

    Suppose tuition is 8,000 and you expect to send a kid in 16 years. your two choices are put in 8K now for guaranteed tuition in 16 years or put in a certain amount each year.

    Scenario 1 Investment growth equals tuition rate increase

    Assume 8%/year. For the prepaid you're golden. For the yearly option, you would have to put in $850/year or a total of $5,600 more that the prepaid

    Scenario 2. Investment growth doesn't equal tuition rate increase.

    Assume 8%/year for investment, 11% for tuition. Under the prepaid, the state is short by $13,000 after 16 years. Multiply that by a large number of participants and you either have a bankrupt program, or massive surcharges.

    Scenario 3. Investment growth exceeds tuition rate increase.

    If you assume 8% tuition rate increase and 11% investment return, then you are giving $13,000 of your money to the state.

    I personally think that Scenario 2 is most likely. If you believe that the state will foot the bill for underfunding, then the prepaid may be the way to go. I doubt it though.
     
  17. Todd Hochard

    Todd Hochard Cinematographer

    Joined:
    Jan 24, 1999
    Messages:
    2,312
    Likes Received:
    0
     
  18. Brian Perry

    Brian Perry Cinematographer

    Joined:
    May 6, 1999
    Messages:
    2,807
    Likes Received:
    0
     
  19. Kirk Gunn

    Kirk Gunn Screenwriter

    Joined:
    Aug 16, 1999
    Messages:
    1,609
    Likes Received:
    0
    Are the tax benefits the same ? I believe the Pre-paid is a tax break on both the state and federal levels.
     
  20. Eric_L

    Eric_L Screenwriter

    Joined:
    Nov 2, 2002
    Messages:
    1,994
    Likes Received:
    1
    This is my professional arena, so of course I therefore am prohibited by the SEC to offer advice without a personal consultation face to face. (very true)

    I will only say this:
     

Share This Page