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College fund: prepaid or 529 saving
Old 07-05-2013, 05:40 PM   #1
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College fund: prepaid or 529 saving

I'm on the fence. My kid is 8 years old having another 10 years before big college expense. I have about $10K in Virginia 529 saving (parked in mutual fund). Having to know that my sister paid almost $100K for her daughter 4 years state college (tuition + room + all expenses), I know i have to step up more.
I have the options to continue the 529 saving or Prepaid.

I have enough saving to pay for the prepaid option $56K guarantee to cover 4 years tuition for state college no matter the inflation in 10 years. when it' s time, we only pay for room and board. that's more manageable situation. The $56K now is about 20% in average more than what it costs now. What I don't understand is that the formula the state set up the price. If my kid was 15 years old now, I have to pay only $58K (only $2K more to make up for 7 years of inflation).

Does it make sense to make a prepaid (for peace of mind) or continue to invest in mutual fund? I appreciate if anyone share your experience with this.

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Old 07-05-2013, 07:12 PM   #2
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I did neither. I wasn't keen on the constraints compared to the benefits of either so I just saved in taxable accounts using the Vanguard STAR mutual fund.

The thing I didn't like about the programs is what if you kid's first choice is a school across the country, or s/he decides not to go to school, etc.

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Old 07-05-2013, 07:28 PM   #3
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Three kids with 529 plans for each, enough to cover 4 years of state school plus a little extra. Read the fine print on the 529 plans and you will find they are very flexible (can transfer to other siblings, cousins, etc and CAN use for housing and book expenses). My personal opinion is that if your state has a good low cost option such TIAA/CREF or Vanguard and especially if you get a state tax break, it's a no brainer. I get a state tax break for up to a 20k/year investment (5% of 20k is 1k, so I'm getting one thousand clams for free).
Also, if you know your child will likely go to an in state school the prepaid plans are a good deal. In fact, they are so good that many states have closed them. Most of the prepaid plans will pay the current state rate if your child goes elsewhere. Just my experience.
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Old 07-06-2013, 11:10 AM   #4
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I used both prepaid tuition and savings fund, they are MET and MESP in Michigan, both worked well in my view, especially MET since both kids went to U of M Ann Arbor the state's most expensive tuition paying the MET averaged rate. Save state tax of up to $5k per year per child. As previous poster stated lots of alternatives if child doesn't enroll.
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Old 07-06-2013, 03:25 PM   #5
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We used prepaid. In Florida, it was about 5500.00 at age 2 in 1987. My recommendation would be to save as much as possible but have your child take out loans to pay for college. They are setting up different kinds of repayment options that allow for repayment for pennies on the dollar. You can then reimburse your child if you like.
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Old 07-06-2013, 03:57 PM   #6
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I think it is like asking if you should buy a fix-float interest rate swap. Really comes down to your expectations of college tuition over the next N years and how that matches up with the prices you are given.
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Old 07-06-2013, 09:19 PM   #7
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What are the odds your child will want to attend the pre-paid college versus go somewhere else or choose another option (vocational school, military, travel, apprenticeship, or straight to work)? I guess you can inculcate them with the expectation they attend the prepaid school, so they don't even think about the other options...
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Old 07-07-2013, 12:32 AM   #8
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If you have not already done so, you may want to get some books on financial aid to see if the 529 is really your best choice.

If your income is high enough when the time comes you may just be able to pay out of pocket. Or if you are retired, semi-retired and/or self employed you might be able to control your taxable income enough to get financial aid. There are many assets classes that exempt for financial aid consideration per the FAFSA - business with under 100 employees, home, and retirement accounts.

If those options don't work, IRA funds can be used for college penalty free (not tax free). Or 401K funds rolled over to an IRA can be used for college. Retirement money can stay where it is if your kids get merit or financial aid or decide not to go to a 4 year college.

Our current plan is to try to keep our taxable income very low for the next few years and try to get financial aid and health insurance subsidies, as well as keep the tax bill low.

We will pay for all the college expenses either way, but if they can get some aid or low interest loans we can pay back for them later that will be a plus for our finances.

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