529 Guaranteed Savings Plan?

[bobosensei]

I wouldn't prepay college tuition. I don't think it is fair to decide something like where the child will go to college without their input, even if they have flexibility of going anywhere within your state. I think I've also heard financial gurus saying that prepaying the tuition isn't as good of a deal, maybe Suze Orman?

I say throw what you can in the 529. At 18 the kid can decide where to go- if it covers the entire cost fantastic, if not, they can figure out how to fund the rest.

[Deleted]

This is what Clark Howard says about 529s vs prepaid tuition:

There is a very good deal under the tax code for saving for college called a 529 plan. This is a tax-exempt account you can open and contribute to as you wish, where the money you put in grows tax free and gets spent tax free on college expenses. And the nice thing is the beneficiary can change from child to child as one child gets a scholarship, another decides to major in Harleys instead of Harvard or whatever else life can throw your way!

There are many of these 529 plans, even in a single state, but most of them are garbage. You see, states have to sponsor plans, but they're run by financial houses. In many cases, the states sponsor outrageously high-cost plans that wipe out any real tax benefit and do nothing but harm your wallet and your child's college education savings fund.

That's why I work so hard coming up with a list of good 529 plans by state on ClarkHoward.com.

I'm also asked about buying pre-paid tuition credits at state schools in states where this option is available. Well, those plans are under assault. Smart Money magazine reports 8 of the plans are now shut down, and others are teetering on insolvency. That's because states planned them without good math behind them and the money that parents put in was not enough to cover tuition years later.

In some states, the state is the guarantor of the pre-paid tuition plan, but in others it's not. So there are now lawsuits where parents feel cheated by their states. As far as money the not being there for your kid, don't waste a lot of time worrying about that. If these plans do go insolvent, legislators typically come in and back the plan (at least for those already enrolled) even if there's no explicit state guarantee.

But pre-paid tuition plans will be a less and less viable choice. Americans move so often around the country, and despite your best intentions, a kid may choose a different path other than a state school. That's why my preference is and remains for a 529 plan rather than a state pre-paid tuition plan.

If you're in a prepay plan, no need to change anything or head for the hills. But if you're making a decision about which to do today, my preference is the 529 account.

[Deleted]

If you can afford to lock in college credits at today's prices, go for it. The cost of college rises much faster than the cost of living in part because as education funding gets slashed, colleges are on their own to raise the money. There is no ceiling on how fast tuition can rise.

I wouldn't worry about deciding for your child "where" he or she will go. "Almost" anywhere in the state is a pretty good option for most kids, particularly if it doesn't come with huge student loans attached. Bobosensei's comment that "they can figure out how to fund the rest" is pretty ingenuous when dealing with 18-year-olds. Most don't understand the consequences of borrowing large amounts to attend the college of their "choice."

One caveat, though, is to doublecheck the fine print. Many parents in the Alabama Prepaid Affordable College Tuition Program (nicknamed PACT) thought the state was guaranteeing a prepaid college education when in fact it was not. It presented itself as a guaranteed program for a few years (hence some lawsuits), but the fine print said it was not backed by the state of Alabama. Like everything else, it hit a shortfall with the stock market crisis.

It turned out that parents might have been better with a 529 if it wasn't guaranteed. At least, then, if there were excess earnings, their student benefited.

ETA: Archie hadn't posted when I was writing this, but I basically confirm what his post said.

[Savoir Faire-Demogague in NJ]

Suppose the kid decides they want to go to a technical school to learn to be an electrician or an HVAC techincian?

A 529 plan will pay for this sort of education.

[Gardening Grandma]

I have a guaranteed tuition plan for my grandkids.
They can use the funds to go to any college in the country, public or private.
They can also use the funds for vocational training in vocational/tech schools.
If they get a scholarship, the funds can be used for room, board, fees and other education related expenses.
If they don't need or use the funds, they can be transferred to another family member. Or I can withdraw them, pay a modest fee and taxes on the gains (not on my contributions which were after tax) and spend them as I choose.
My plan is guaranteed by tbe state of WA.
You do have to read all the fine print, but I like knowing that, no matter how much tuition rises, they are covered.

[phil5185]

One problem with the govt plans is that they change several times in a generation. The 529 was invented in 1996 - in a few states. Now most states have it. By the time today's 'K' kids go to college, it could be completely deforest again.

And the fees constraints tend to offset the tax benefit. IMO, you can do better by investing in a Index Fund in your own name, pay minimal fees, grows tax deferred, pay only capital gains tax on profit when you sell. And have more 'net' money - available for anything the family decides to do.

If you have moved to a new state in 18 yrs, if your child excels in a field that sends him out of state, the money can be used. Or if your kid becomes a child movie star - or an NBA Player - you can keep the money for grandkids. It is hard to predict 18 yrs - the tax code will be different, your family's plans will have changed - the common denominator is that whatever you decide will take money - so keep the money generic.

[Savoir Faire-Demogague in NJ]

And the fees constraints tend to offset the tax benefit. IMO, you can do better by investing in a Index Fund in your own name, pay minimal fees, grows tax deferred, pay only capital gains tax on profit when you sell. And have more 'net' money - available for anything the family decides to do.

I am not paying any of these fees on the account I have for my grand son. Funds available when he gets ready to attend post seconday education can be used for nearly any type of program anywhere he chooses. Money grows tax free, and withdraws to pay expenses are also tax free.

Additionally, deposits and contributions can be made by other relatives, such as doting great-grandparents with no gift taxes due.

[Gardening Grandma]

I think another possible drawback is what if we move to another state?

The plan I have - they can use it for any school anywhere in any state. You have to look carefully at each plan There really is a lot of variation in these plans, so you have to know what you want and what they offer.