Author Topic: 529 savings performance vs Prepaid Tuition  (Read 1841 times)

ETBen

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529 savings performance vs Prepaid Tuition
« on: September 21, 2016, 12:26:40 PM »
I have searched all over and can't find any good sources on what makes best financial sense. I know the general pros and cons of both types of plans.

What I can't find is a comparison that tells me the difference in paying for 2 yrs prepaid tuition vs contributing the same amount in a 529. What would have the greater final yield?

It would be an estimate as you can't totally predict the return on the 529 or the future cost of the tuition.

I'm hesitant to commit to prepaid tuition, which would likely be payments over 3-5 yrs. I can afford them but you can't predict the future. In general I like having flexibility of my $ but then I also want to use my $ wisely.

Axecleaver

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Re: 529 savings performance vs Prepaid Tuition
« Reply #1 on: September 21, 2016, 03:17:31 PM »
Well, 529 performance can be estimated, because they're based on market returns. You could assume 8% after inflation, if it's invested in VTSAX, for example. It's really tough to estimate future tuition. Make some assumptions for what you believe will be future tuition increases at your school system. While tuition has gone way up in the last 20 years, different school systems have individual circumstances that help define their likely future growth.

tweezers

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Re: 529 savings performance vs Prepaid Tuition
« Reply #2 on: September 21, 2016, 03:46:09 PM »
The Washington State GET program is a good example of the failings of pre-paid tuition programs.  Basically, the premise was that tuition would rise annually by percentages significantly greater than market returns.  However, recently approved college affordability laws have resulted in tuition dropping and the system collapsing.  We pulled the money we had in the program (<$3K; we just started saving for college) during the penalty-free period to do so and will be putting it into a 529 account tied to the stock market.

ETBen

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Re: 529 savings performance vs Prepaid Tuition
« Reply #3 on: September 21, 2016, 04:06:57 PM »
The Washington State GET program is a good example of the failings of pre-paid tuition programs.  Basically, the premise was that tuition would rise annually by percentages significantly greater than market returns.  However, recently approved college affordability laws have resulted in tuition dropping and the system collapsing.  We pulled the money we had in the program (<$3K; we just started saving for college) during the penalty-free period to do so and will be putting it into a 529 account tied to the stock market.



That's what I'm worried about. Depending on how much tuition increases, the return on the 529 could be better. I pulled our states 529 plans and returns and fees. They don't seem to publish what expected rate they are expecting for tuition in their calculations for the Prepaid plan.

seattlecyclone

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Re: 529 savings performance vs Prepaid Tuition
« Reply #4 on: September 21, 2016, 04:34:49 PM »
It really depends on the terms of your prepaid tuition program. Washington's GET program was selling units for something like a 50% markup over current tuition prices, meaning tuition would have to outpace the stock market growth by more than 50% before the prepaid program makes sense. I'd probably bet on the market with those terms. But if you get to pay tuition at today's rates, that could be a better deal. Hard to guess what the future will bring for tuition growth though. It's easy to look at the past and extrapolate that toward the future, but it's also easy to imagine a breaking point where more kids would start to seriously look at the costs and we would see more colleges start to compete on price rather than campus shininess. Hard to say.

catccc

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Re: 529 savings performance vs Prepaid Tuition
« Reply #5 on: September 21, 2016, 10:50:49 PM »
I wasn't so mathematical about it, but I went with the 529 tied to the market just because I understood it a lot better than prepaid tuition.  The prepaid tuition plan I was looking at in my state just seemed so complicated you "invest" and basically buy credits at a specified rate to be used later.  IDK, the market was just simpler!

ETBen

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Re: 529 savings performance vs Prepaid Tuition
« Reply #6 on: September 22, 2016, 11:00:33 AM »
Ours isn't a credit system. Basically, 1 year of tuition now is $10k. If I were to buy that 1 yr now, it's $22k. Spread it out over 3 years and that 1 yr costs close to $26k

Given that my son has 9 years left until college, that's about 11% compounding growth, right?

I think that's higher than tuition has actually been shown to increase but again, difficult to predict.

catccc

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Re: 529 savings performance vs Prepaid Tuition
« Reply #7 on: September 22, 2016, 01:33:52 PM »
Ours isn't a credit system. Basically, 1 year of tuition now is $10k. If I were to buy that 1 yr now, it's $22k. Spread it out over 3 years and that 1 yr costs close to $26k

Given that my son has 9 years left until college, that's about 11% compounding growth, right?

I think that's higher than tuition has actually been shown to increase but again, difficult to predict.

Can you explain this in further detail?  So you'd pay for a year of tuition, meaning $22K out of pocket right now?  Also, what happens to the prepaid tuition if your kid doesn't go to college?  And is he restricted to in-state schools?

ETBen

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Re: 529 savings performance vs Prepaid Tuition
« Reply #8 on: September 22, 2016, 03:36:21 PM »
Yes you can pay $22k now for one year of public in state university. Or spread that cost it over 5 years for about $26k. They offer this for increments of 1-4 yrs university and 1-2 yrs community college. If they choose private school or an out of state school, they convert your amount to a weighted average to use towards that cost. None of this includes room and board.

It's a lot to calculate to compare and honestly, I haven't spent much time on it yet. Their father is paying 2 yrs prepaid University for them. This "guaranteed" concept appeals well to him. I'd rather maximize return.

I have the other two years of their college and am considering what to do. I could do prepaid Community college, prepaid Uni, or regular 529. I like my children to have some skin in the game but also recognize that there is a benefit to not being shouldered with huge student loans. I am able to save for my retirement and save some for their college at the same time.