<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>No different in practice or concept than periodically putting money into a savings account.</p>
<p>vballmom,
As I noted earlier, net stock returns have to be over 9% before taxes to break even with this pre-pay (as it stands now, until 6/30) given our 6% college inflation projection. I think this pre-pay risk is more similar to a CD than stocks, at least in a 3 year time horizon. Each to their own, but a 9% CD sounds mighty attractive to me right now, with an inflation hedge built in no less!</p>
<p>Not really. The accounts will change in time together. The way I see it is that the $1000 is compartmentalized with its own set of figures. Next year if I put in another $1000, that again is put in a box with its conditions. In a savings account, that is certainly not the way it works.</p>
<p>
Just the portion attributable to the $1000.</p>
<p>
If you don’t have the $20K up front, you can’t really take advantage of this on the 3 year plan.</p>
<p>
This is not a fair apples-to-apples comparison. You would need to put that $20K into another 529 plan and invest it in something. Most schools offer a 0.5% discount, and most schools my kid looked at this year held their increases to 3 to 4%. So rather than a 7% return, 4% is much more realistic.</p>
<p>This gives you a 16% total return, which to match in a 529 plan requires a 5.1% annual return, which is a far cry from 9.75%.</p>
<p>For longer term, the downside is that if your kid doesn’t go to one of those schools (and it looks to me like a large majority are tier 3 or lower), the best you can do is a 2% annual return, and maybe (probably) less. Now you are in CD or cash territory.</p>
<p>2.75% is really low for a HELOC too, is that a teaser rate? I don’t think I’ve ever seen one that low. Mine’s at 4% and my CU doesn’t even offer a rate that low any more.</p>
<p>This 529 plan may only be used for tuition and mandated fees. R&B are specifically excluded, and I imagine that includes books and personal expenses too.</p>
<p>I called the plan and the college to try and verify how much our tuition is, since scholarships are in play. Our case will be a 50% tuition scholarship, $9000 college grant, and $1000 NMF grant through the college. I wondered if the rules let me pay 0.5 tuition from the i529 pot, or if I am only allowed to pay (0.5*tuition - 10,000). The i529 CS rep had no idea; the college bursar thought I could withdraw one tuition equivalent each year from the i529 pot.</p>
<p>I think they are both wrong, and plan to pay 0.5 tuition each applicable year from the i529 pot.</p>
<p>notrichenough,</p>
<p>The 3 - 4% increase this year occurred when the CPI change was 0. ZERO
You are ignoring the discount rate.
You are ignoring the risk of high inflation, which the pre-pay protects against
You are ignoring the risk of short term stock volatility.</p>
<p>I am not pushing this plan to anybody, but please try to be accurate.
My HELOC rate is not a teaser rate. Lots of banks offered prime - 0.5% or so when I took this loan out about a year ago. The loan is with PenFed.</p>
<p>As for the colleges participating, I saw a pretty good mix. Harvey Mudd, Stanford, Claremont and Princeton as examples are ok in your book ?</p>
<p>
The downside to using the grant money for room and board is that it becomes taxable income for the student.</p>
<p>In addition, if you cover all the tuition with scholarships and 529 plan distributions, you will lose out on any tax credits available from the tuition deduction, Hope Scholarship, and Lifetime Learning tax credits.</p>
<p>These deductions saved me $2500 in taxes this year, which wipes out a large chunk of the savings.</p>
<p>The financial aid director at my son’s college didn’t have a clue how the i529 worked when I called earlier this spring. Since the rules are changing, it might be a good idea for anyone making an investment prior to 6/30 to print out all the terms as published (if available online) to have some documentation in 3 years.</p>
<p>The tax credits should definitely be part of the equation. Unfortunately they phase out at certain income levels, and so are not always available.</p>
<p>This is one of those situations where your mileage definitely varies.</p>
<p>
Good point.
My tax life is simple – I pay a lot, and in return am not troubled by deductions and credits ;-)</p>
<p>
Colleges are under a lot of pressure to hold down costs, my guess is that they won’t be much higher than 3-4%.</p>
<p>Princeton’s last two increases have been 2.9% (2009-2010) and 3.3% (2010-2011). Stanford went up 3.5% for 2010-201. Both are increasing aid.</p>
<p>
No I didn’t, I used an average increase of 3.5% with a 0.5% discount: (1.04)^3*1.0318 discount = 1.161, or a 16.1% total return. This is 5.1% annualized.</p>
<p>
This is the best thing this plan has going, if you think we are going to see high inflation. I’m not so sure in the short term.</p>
<p>
There are lots of lower-risk investment choices than stocks.</p>
<p>
Sure, it’s great you are one of the 10% of kids who can get into these schools.</p>
<p>But for every one of these there are 10 schools no one ever heard of like Hannibal-LaGrange College and Schreiner University.</p>
<p>This plan’s not bad if you are doing it for your kid’s senior year, but for long-term (10 years) it’s a big risk, because if your kid’s school isn’t on the list, you will lose 10 years of earnings.</p>
<p>
Fair enough.</p>
<p>
That return your low-ball estimate of 5.1% after taxes ? I’d like to hear two. A 6.5% home loan would, which is my suggestion as an alternative for people that have one. Noted in my first post on this topic, If I remember correctly.</p>
<p>
Along with the 2% upside limit, there is a 2% downside loss limit. So although I agree with you overall in this point, it is not what you portray.</p>
<p>
You are moving the goalposts of your argument. You first stated <a href=“and%20it%20looks%20to%20me%20like%20a%20large%20majority%20are%20tier%203%20or%20lower”>quote</a>
[/quote]
</p>
<p>Why don’t we stick with just trying to clarify the numbers, rather than spin arguments to have a “winner” ? Frankly, I have no desire to debate you.</p>
<p>
I feel your pain. 
You don’t need to itemize to take the tuition credits though. If your income is over the phase-out amounts… well, it’s not a bad problem to have.</p>
<p>
Here’s one - my state’s 529 plan has an intermediate US gov’t bond fund that has returned 6.29% annually over it’s life-time. Not CD-safe, but no stocks either. Since it’s in a 529, taxes don’t apply.</p>
<p>
I can’t find anything on their web site to indicate what the historical return has been for people who took their money out. My point is more that over a long time period you can miss out on other investments that have historically returned a lot more than 2%/year if you wind up at a school not on the list.</p>
<p>And don’t wait until the last minute - from the disclosure brochure:
I think this means you have to have your money in by June 23.</p>
<p>
I thought we were just having a nice discussion.</p>
<p>Part of clarifying the numbers, in my opinion, for a long term investment, is figuring the odds that your kid will attend/will be able to attend one of the schools on the list. Signing up in hopes of saving money for Princeton or MIT seems like a bad bet given their single-digit acceptance rate. And given the geographic distribution, religious affiliation, and obscurity of more than half the colleges on the list, I would predict the chances of my kid wanting to attend one of those schools is probably in the single digits as well. </p>
<p>In my particular case I would guess the number of schools my next kid might have the interest in or ability to attend is probably less than 50. Every situation is different, our course.</p>
<p>If your kid is already going to one of these schools, I agree this is a decent plan for their senior year.</p>
<p>Helpful post – thanks. You said
errr…picking <em>a</em> fund that performed well over a period of time isn’t hard in retrospect. That isn’t quite what I had in mind ;)</p>
<p>Most people who invest in 529s pick a basket of bonds and stocks, weighted by how long they plan to leave the money invested. They also tend to have crappy money managers who charge upwards of 1% fees a year. I know – I have one. I’ll look at mine later and post the results, but I promise it is not going to be pretty.</p>
<p>not to change the subject but my brain hurts: we are redeeming this for the fall…my daughter has a merit scholarship from her school…sooo, I subtract the merit $$ from tuition, get a % ratio, and request 50% of that for the semester bill?..sounds like a plan except for the fact that we did not fully fund back in 2007 (put in a lump sum)…I am really confused…I think I will have to call the plan tomorrow so they can walk me through this…</p>
<p>
Well, it’s a 100% bond fund, so it should have much lower volatility than anything with stocks. It’s the closest I could see with a quick glance. The equity funds all got hammered, although many have recovered nicely in the last year.</p>
<p>Paying down your mortgage is a good alternative, although I think it decreases liquidity - not everyone can get a HELOC to get the equity back out. And in my case, since I itemize and have a pretty low interest rate, my effective interest rate is only around 3.7%, and well under 3% for my HELOC.</p>
<p>Ahhh. my 529 portfolio: $8000 invested in 2003, current value is $9000, a 12.5% increase in value.
Through the retrospectoscope, $8000 paid to L&C in 2004 would be worth $11680 today, a 46.5% increase in value that averages a return of 6.5% even before I take into account the discounted rate. With the discount, my return is 54.3%</p>
<p>529: 12.5% return
PP: 54.3% return</p>
<p>I thought your HELOC is 4%. How does it go well below 3% effective ?</p>
<p>
I itemize, and my HELOC interest is fully deductible. In my bracket, the deduction pushes the effective rate under 3%. It’s hard to calculate exactly (well… I’m too lazy to dig out my tax forms) because a portion of my HELOC interest winds up being deductible for state income tax as well.</p>