529 vs prepaid tuition

[Goldy1]

My parents plan to start savign for my newborn son' college. It is my job to fund a plan for him. My mom told me to go to fidlity and research 529's.

However, int he state of Michigan you can pre purchase a child' s tuition.

They have different plans. One example; if you pay $408 a month for 15 years, the child gets to attend a 4 year university. IT costs $328 a month for 15 years to buy 4 year tuition with "limited benefits" which is tuition paid in full if it's the average price int he sate other wise they might get only 92 credits paid instead of 120 if they attend a pricier place.

My question, why the 529 if you can prepay tuition? Is it b/c it might be less out of pocket? I just did the math on the price the above would cost..WOW it's expensive. I don't think the parents will want to pay that much.

[Inkstain82]

With a 529, the money is still in your hands.

With pre-paid tuition, you are now an unsecured creditor. Even to a university, I'd feel uncomfortable with that.

[Goldy1]

Well you can use the money at any state college, not just one. I am assuming you mean if the college closes, you are out your plan. ?

[Inkstain82]

Originally Posted by Goldy1

Well you can use the money at any state college, not just one. I am assuming you mean if the college closes, you are out your plan. ?

You are more or less at the mercy of political will. All they have to do is decide to suspend the program, or more likely simply redefine what is and is not paid for, and you are out some or all of your money.

[Goldy1]

good point. There could be more variables I see.

[zetta]

Also, with the 529, if your child decides to attend trade school (think plumber, electrician, medical technician) instead of college you can use the money in the plan.

If your family has to move out of state for any reason, you can use the 529 money anywhere in the country.

[Like2Plan]

Originally Posted by zetta

Also, with the 529, if your child decides to attend trade school (think plumber, electrician, medical technician) instead of college you can use the money in the plan.

If your family has to move out of state for any reason, you can use the 529 money anywhere in the country.

Zetta,
Most prepaid tuition plans have a provision for doing a rollover into a regular 529 account of your own choosing. It looks like in the case of MET, the beneficiary has to either graduate high school or reach the age of 18 before a rollover can be accomplished.
LINK to MET Frequently Asked Questions

It also looks as if the MET plan can be used for out of state tuition without doing a rollover. (The MET plan would pay at a predetermined rate and beneficiary would have to make up the difference for out of state tuition rates).

[Like2Plan]

Originally Posted by Inkstain82

With a 529, the money is still in your hands.

With pre-paid tuition, you are now an unsecured creditor. Even to a university, I'd feel uncomfortable with that.

Inkstain82,

Many of the programs have a provision where the state backs the prepaid tuition plan if there is a shortfall. There have been some plans which were so far out of balance that they had to take corrective steps. What generally happens is the folks who have already signed up are grandfathered and they stop new enrollments for a period of time and re-wicker the program. The new contract prices generally go up quite a bit when they come back on line.

[Like2Plan]

Goldy1,
Having weathered 3 major downturns in the stock market over the past 20 years, I am a real fan of guaranteed tuition plans.....

However, I am not a fan of paying interest to fund them.
It looks like a contract that is funded over 15 years has a 7.5% interest rate attached to it (They call it a "rate of return" on the chart). The price of the contract for a newborn this year is $73440 financed over 15 years (408 X 12 X 15) vs $44448 lump sum. On the face of it, it seems like a high premium to pay. (15 years is a long time to fund anything... )

LINK to MET contract prices

One question is--if you decide a rollover is best for your DS's college needs (you could do a rollover when your DS reaches 18 or graduates from HS), do you get to rollover the $73,440 amount? If not, how much do you get to rollover?

Some other factors to consider.

With MET, the beneficiary is the only one who can terminate the contract (there are a couple of exceptions) and this is only after the beneficiary reaches age 18 or graduates from HS.

Do you think college tuition will exceed 7.5% per year? On average college tuition has increased at the rate of 8% Link to finaid.org While that has been the trend in the past, there has been some interest in a lot of states to try to slow the rate of increases....

On the other hand, do you think interest rates will increase? A lot of folks are concerned that current monetary policies are going to cause interest rates are going to go up along with overall inflation. Maybe paying a 7.5% premium might seem like a good deal in 4 or 5 years.....

Here are some more links of interest:
The College Board 529 Prepaid Tuition Plans

Link to another article: CNN Is college still worth the price?

Link to MSNBC article. State-run prepaid tuition plans get squeezed

Tracking Recession: Tuition Programs in Danger

[Inkstain82]

Originally Posted by Like2Plan

Inkstain82,

Many of the programs have a provision where the state backs the prepaid tuition plan if there is a shortfall. There have been some plans which were so far out of balance that they had to take corrective steps. What generally happens is the folks who have already signed up are grandfathered and they stop new enrollments for a period of time and re-wicker the program. The new contract prices generally go up quite a bit when they come back on line.

That's what happened so far. But provisions are always a 51-49 vote away from being overturned.

I hate to sound all Austrian-economicy, but I don't trust most state governments' financial situations right now enough that they wouldn't do some pretty unthinkable things.

[Like2Plan]

Originally Posted by Inkstain82

That's what happened so far. But provisions are always a 51-49 vote away from being overturned.

I hate to sound all Austrian-economicy, but I don't trust most state governments' financial situations right now enough that they wouldn't do some pretty unthinkable things.

Overturning these provisions (and nullifying govt contracts) goes contrary to the US system of finances in which a govt backed guarantee means something.... I can't say it is fool proof or 100% guaranteed...but, I think your chances are pretty good that you won't be hung out to dry.

[atomicrc11]

Also, if you pick a 529, check who administers it. I know Connecticut and some other states use TIAA-CREF and they allow contributions in the form of mutual funds or principal plus income annuity. This way you have a guarantee of your principal and get some money on top of it. There are many different options out there to fit all situations and risk tolerances.

I personally would open a Fidelity 529 and use their index mutual funds. I just happen to like Fidelity better but Vanguard has similar offerings at the same expense ratio.