<p>Rephrased a bit:</p>
<p>For more risk/reward, invest in the stock market with inexpensive money managers;
For lower risk/reward, pre-pay mortgage.</p>
<p>By the way, if the demands on the funds exceed assets, what happens ?</p>
<p>Lewis & Clark
Year…Tuition ($)…YoY (%)…From 06/07…Gen Inflation…From 06
2006-2007…29,772<br>
2007-2008…31,840…6.94%…3.5%
2008-2009 …33.726…5.92%…4.6%
2009-2010 …35.233…4.47%…4.7%
2010-2011 …36,394…3.3%…22.2%…0.0%…13.4%</p>
<p>For this school, tuition has inflated about 2%/annum faster than the CPI used by the US government.</p>
<p>“Maybe these big businesses (colleges and universities) could lower their tuition by 1% or at least tie it to the rate of inflation!!!”</p>
<p>errr… prepayment is exactly a hedge against specific cost inflation growing faster than wages. You can untie that knot in your panties now. I think the better question is whether the opportunity cost and participation risk is worth it. I’ve tried to answer in my earlier posts.</p>
<p>ohmadre (and anyone else who could answer this)- in a situation where someone is receiving a substantial amount of financial aid, does the percent increase in tuition per year, necessarily correlate to a similar increase in financial aid to help keep the EFC the same (assuming the family’s income stays the same)?</p>
<p>
I think this is a question only Duke can answer.</p>
<p>There’s no guarantee they will increase your aid package, there’s no guarantee they will increase the amount of grants instead of increasing your loans, there’s no guarantee they won’t <em>decrease</em> your grants and give you more loans. If you are worried about this you should call the Duke FA office and ask them what their policy is.</p>
<p>
No. Typical is the following:</p>
<p>If the ‘aid’ is scholarship or grant and a dollar amount, it is constant. If given as e.g., 50% tuition, then amount will change as tuition changes.</p>
<p>If the ‘aid’ is need based, then it will change in proportion to tuition. Or maybe Cost of Attendance.</p>
<p>Only your college knows for sure. Ask them.</p>
<p>So, EricLG, are you going to prepay?</p>
<p>Toledo,</p>
<p>I might prepay one semester or one year, although my circumstances are unusual enough that you should read below the specifics of why, and not generalize. My daughter will start college this fall. Since the plan requires that 36 months pass before pre-paid money can be used, the most I can consider is pre-paying senior year. That is ok by me, I would not be inclined to pay more into the plan because of risk and diversification concerns.</p>
<p>I owe the tail end of a variable HELOC loan on my home currently at 2.75 apr I can pay off over about 4 months from salary should the rates jump. I don’t have other loans, I do not itemize my tax return, and my salary is likely to pace general inflation. Each month I save salary that I currently divert to my HELOC and to a cash equivalent. I expect to buy both stock funds and individual stocks over the next 12 months – but that is far from certain.</p>
<p>Second, my daughter’s college bumped up tuition 3.3% for 2010-2011, and offers a 1% additional discount for pre-pay until 6/30. So by my reckoning I save 4.3% now, and then about 2% over inflation for the next three years if historical trends continue. My low-risk alternative is a 5 year CD that would net me ~ inflation rates or less. Lastly, I guess that recession level inflation will continue for another two years or so, and then ramp up pretty quickly to high levels.</p>
<p>If I had a big 5%+ fixed loan, I would pay that down instead. If tax deferred retirement was not funded (or even better, a company match was under-utilized) I would definitely do that first.</p>
<p>Anyway, that is for our case. Adding a high inflation hedge to my portfolio is smart, and for now I don’t have obviously more attractive alternatives. In a more general sense, this plan suffers from man in the middle costs, and over enough time will be worse than simply putting money in a broad-based, low fee fund like those found at vanguard.</p>
<p>One detail not discussed yet in this thread:</p>
<p>Tuition fractions purchased through June 30th receive a discount of 0.5 - 4.0%. This discount is applied <em>each and every year</em> until funds are redeemed. So e.g. as an approximation, one year of tuition bought today and redeemed at a college that offers a 2% discount, will buy 1.26 years of tuition in 2020.</p>
<p>This is the killer part of this deal, but is going away from 7/1/10.</p>
<p>I don’t quite understand the discount. Would there be any big advantage just putting, say, $1000 in an account before June 30th, or would the discount only apply to the amount actually put into the account? The article says big sayings for anyone having “a few thousand dollars” and starting the account by June 30th, but I see only small savings for anyone putting in the small amount.</p>
<p>
Only 13 out of 274 schools offer a 2% discount, and 1 has a 4% discount. About 2/3 have only a 0.5% discount.</p>
<p>So unless your kid goes for one of these 14 (mostly obscure) schools (I never heard of most of them), this part of the deal is not quite so “killer”.</p>
<p>
The way I read it, each time you put money in you are buying a certificate worth a certain percentage of tuition at each school.</p>
<p>So if you put in $1000 before June 30, you save an extra 1% (or whatever) per year only on that $1000. Over 10 years, you would save an extra $100. </p>
<p>That’s an extra 10%, which is a lot in percentage terms, but in absolute terms you are only saving $100.</p>
<p>That’s how I read it too. That’s why I don’t get the big savings part. Why should a rush to put in the money by June 30 to save maybe $100 in ten years? Nice if can put in $100K, I guess, to save $10K maybe in ten years, but that means pulling that money out from somewhere else if you even have it. I don’t get this need to rush before 6/30.</p>
<p>notrichenough,
If tuition was $1000 a year, you would have a good point.</p>
<p>CoTH, contributions up to 6/30 will have two advantages:
- Tuition cost is based on 09-10 rates, not 10-11 rates.
- The discount will apply yearly until you withdraw the money.</p>
<p>The only rational way I can see for people to decide if this plan is a good idea for them is to compare it to whatever alternative they would put the money into. I’ll present my case as an example:</p>
<p>Prepay $20k now, or pay down HELOC by $20k, saving 2.75 apr;
Pay today, use in 36 months;
Assume college inflation is 2% greater than US CPI; Average CPI is about 4%
College discount is 1% annualy, compounded at 6%;
No tax deductions apply;</p>
<p>HELOC:
In 36 months I have 20,000(1.0275)^3= $21,696</p>
<p>Pre-pay:
I pay .967 of today’s tuition of $20K, in 3 years I have 1.0318 Tuition equivalents. If tuition has increased by 6% annualy, and I include the discount, this is equal to 20,000(1.07)^3=$24501. My money has increased in value by 27%. I am $2800 ahead of the HELOC alternative.</p>
<p>Stock appreciation Break-Even, assuming 15% cap gains:
9.75%</p>
<p>From the article:
</p>
<p>I think that’s a pretty good savings, even if our kids are going to be freshmen this year, which limits us to only paying for senior year. Even if tuition only increases 4-5% per year (the average increase in recent years at the two private colleges my kids will be attending), and I saved 1% by buying it this month, it’s better than the 1.5% I’m getting on my money market at the bank.</p>
<p>The entire tuition cost is based on 09-10 rates or just the portion attributable to the $1000? I would get the same discount each year on contributions just because my first contribution was this year? I guess what I am asking, is if it is worth it for me to put a measly $1000 in the plan to get some benefit on future contributions that I would not get if I joined this plan next year. I understand I would lose a year of interest if I join a year later. But would benefits apply to the entire tution costs or just to the $1000 I would contribute as a “space keeper” for the 'discount"?</p>
<p>My understanding is that benefits are calculated according to each contribution, with the rules then in effect.</p>
<p>No “place-keeper” strategy, as I think you are using the label.</p>
<p>From how I understand it, you’re only locking in that percent of tuition that you prepay. So if you put in $1000 now and tuition in 2009-2010 is $10,000, you’ve locked in 10% of whatever the tuition costs in 3 years. So if tuition in 3 years is $11,576 (assumes a 5% increase every year), your $1000 now will buy you $1158 of the total cost in 2013, and you pay the remaining $10,418.</p>
<p>I’ve been toying with the idea of prepaying 50% of my son’s tuition for several months now but just can’t bring myself to send in the cash. The rate of return on these funds is limited to +/- 2% per year. If you think you (or your 529) can do better than 2% + whatever the tuition discount is, then it’s borderline worth it to lock up the money for 3 years. This also depends on your view of future inflation. </p>
<p>One of my son’s 529 accounts, for example, has earned an annual rate of return of 3.67% for the past 3 years. It’s an age-based fund so the assets are allocated fairly conservatively, with about 20% equities and the rest fixed income/cash. A slightly more aggressive strategy in his UTMA has earned 8.5%/year at an annual rate. </p>
<p>I guess everyone needs to really do the math, and run different scenarios as to the opportunity cost of not having that money in other investment vehicles (or available to pay down debt, as in EricLG’s example).</p>
<p>What a lot of calculating that is going to be with each little contribution treated in terms of when it was made under what terms!</p>
<p>Toledo, the pre-pay alternative using your numbers looks like this, after I assume a 4% savings by locking in 09-10 rates:</p>
<p>MM: 1.015^3=4.5678375%
PP: 1.055^3=17.4241375%. Upfront discount applied – 17.4241375/.96=18.15%.</p>