529 Savings Plan vs 529 Prepaid Tuition Plan?

Question

I have decided to start a 529 plan for my 6-month old daughter. Now, I need to decide whether to go with the savings plan model or the prepaid model. I have heard some of the top advisors speak against the prepaid model, but I can't help but think about the safety of tomorrow's (18 years from now really) college at today's prices. College tuition rates increase at really high rates, so I don't think it would be a horrible decision. On the other hand, you would expect a savings plan to be able to grow at around 8%. So, anyone have any advise about which would be the better option. I am looking for pros and cons of each as well as your preference. I have already been through the discussion of whether to start one or not. Now, I am just working on which one to start.

Thanks in advance for the answers.

Answer 1

Prepaid tuition plans and 529 plans are treated differently on the FAFSA...today!  Who knows how they will be treated by the time your little precious in 18 years.  Currently, prepaid tuition plans (if they are in the child's name) are not treated as an asset AND cannot count against your child's eligibility for federal and state financial aid.  529 plans count as an asset on the FAFSA, affecting the EFC, thus (presumably) making your child less eligible for financial aid.  Because you are purchasing a 529 plan/prepaid tuition plan, the assumption can be made that it is unlikely that with your household income you would qualify for need based aid anyway.

SO...you have to consider other things not necessarily financial aid eligibility in choosing one plan or the other.  For example, prepaid plans...are they transferable, to whom, for how long...and what happens to it if no one uses it.  529 plans...is it transferrable, to whom, for how long...and what happens to it if no one uses it.

Personally, my advice is generally pump the same amount in your IRA that you would have for a 529.  You can take money out of your IRA without penalty or taxes to pay for college education and you don't have the worries of what happens if...if your little darling doesn't go to college or gets enough scholarships that she won't need the plan.

At any rate, I do financial aid, not financial advising and you should run my suggestion by a knowledgeable advisor before you make any decisions.

Good luck.