Prepaid vs. College America
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Anonymous
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Since my kids have been born 8 and 6 years ago, I've been socking away money in a 529 plan run by the state of Virginia. The College America plan run by American Funds. It always annoyed me to pay the 575 basis point load (I mean, a load-fund? Really?) but the tax break offsets the load fees and the fees are smaller on the backend. Still, given market performance recently, all I recently was left with when I received my last statement was the principal. Sigh. At least I'm not losing money, right? So, the Open Enrollment period for Prepaid tuition plan just began and I'm thinking of shifting strategies. My thinking is the return on investment for the prepaid tuition is the inflation rate of college tuition in the state of Virginia. We all know college tuition inflation has been off the charts, right? As it is, I'm undercontributing to the 529 plan. About $650 a month for both kids. For $50 more per month, I can commit to monthly payments towards two years of university-level tuition for each kid (with the idea of starting to buy a couple of more years when finances are better at a later time) IF I stop contributing to the 529 plan (but leave those balances in place). My concern is I keep hearing how difficult it is for even top-performing students from Northern Virginia to get into the better VA universities, so if I was going to hedge in THAT direction, I'd probably prefer to chase market return since I have another 10 years before college. What to do? I can do one or the other but not both. |
Anonymous
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Look carefully at the plan as we did Maryland which has a very limited number of state schools vs. other states BUT, it allows us to transfer the money to either another public or private school and cash out toward a private school. It is for tuition only but if they get scholarships it can be put toward other college expenses. Our logic for doing it was to make sure we had a minimum plan in case the market drops so we don't lose everything. Once we have it paid off we will save privately but we are relieved to know we have something, especially given how much tuition and other fees are going up.
Personally I'd keep what you have an go to the prepaid but its a personal choice. |
Anonymous
My understanding is that they've built inflation into their projection of what they think you'll need. Then, they assume a below-market rate of return because, after all, they are bearing the risk and are on the line if your total payments fall short of the full tuition amount. So, for example, assume that today's total tuition for 4 years is $100K (obviously I'm making this up). The plan managers make some assumption about inflation over the next 17 years, and come up with a projection that 4 years of tuition will be $150K when your kid is ready to go to college. So your payments are based on $150K, not $100K. Next, what rate of return do they build in on your monthly payments? Probably a low-ish assumption, like 2%. Because if they assume you would earn 8% annually, and this never happens, then you might only have $140K (again, I'm making these numbers up because I don't have time to work out a real example, and you get the point anyway!!!), then because they have promised you everything will be "pre-paid," they will be on the hook for the missing $10K. At least, this was our understanding when we looked into this about 10 years ago. Plans may have changed, and your plan may be different! |
Anonymous
OP: Thanks. I guess I need to read the actuarial assumptions carefully. If they're pricing in inflation, I guess that's not such a hot deal. But I thought the whole point of these programs was to buy at today's prices. |
Anonymous
| Personally, I am not ready to commit to Virginia public schools. We really don't know enough about who he will be to tie up the money. |
Anonymous
OP: That's not a concern for me because the money can transfer out of state if need be (the equivalent amount). So the real gains to doing this are: 1) Buy in at today's prices (if that's in fact, how the program works) and 2) Tax break for buying into the residency state's 529 plan rather than, say, Oregon's or something. |
Anonymous
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Figuring out whether you are paying an inflationary amount or "today's tuition" price is a little more complicated b/c the cost of state universities in Va is not the same across the board. For instance, Tuition at GMU is $9266. UVa is $11,576, Va Tech is $10,509, and William/Mary is $13,132.
The cost of a prepaid plan for the season that just opened up (for a younger child, K-4th) is about $13,300. So if your child goes to William and Mary, you are actually paying today's prices. For the other schools, you are not paying today's prices, but, these pre-paid plans are going up about $500/year. On average, the cost of a year of Va. tuition is about $11,000 (presently) and you are paying $13,300 in the pre-paid plan for that year of tuition ... but you know that it is guaranteed to be covered (it's in the plan). You aren't really locking in "today's prices" but you are locking in the price that you will have to pay for tuition. It wasn't until I started looking at the cost of "out of state tuition" at nearby states that I realized there was no way we'd be paying $30,000 for my kid to go to UNC or UMd. as an out of state student if I could pay $13,000 for essentially the same education. And so, we made the executive decision that our kids will have enough choices to get them a solid college education in our state, and that's where we're putting our money. To me, an undergrad degree is pretty much the same wherever you get it. The pedigree matters more for graduate studies, so we can cross that bridge when we get to it. But, my kids are going to Va. undergrad schools (unless they want to take out loans for private or out of state options -- which I will advise them not to do, but they would have that choice). |
Anonymous
Actually, OP. That is not true. You will take a substantial penalty if you do the prepaid and then send your kids to school in Oregon. On that one, I suggest that you read the fine print VERY carefully and perhaps get some professional advice. |
Anonymous
| Is this penalty something specific to the VA prepaid plan? I did read the Maryland plan carefully when we bought it (10 years ago) and did not find anything of that sort in the plan. |
Anonymous
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I think 9:21 is providing misleading or inaccurate information.
Here's how it works. You pay the contract price now for one year of university tuition inVa. Let's say that price is $13K. In 10 years, when your child is ready to go to college, if s/he went to to a Va. univeristy, VPEP would pay one year of tuition and fees. We'll estimate the actual cost for tuition and fees at that time to be $18K (this is just a guess, but we can agree that it's going to be something more than the cost of tuition and fees today -- which is on average $11.5K). IF your child goes to a private school or out of state school, then VPEP will give you the amount of your contract plus the "reasonable rate of return" (which right now is like 0.5% b/c interest rates are so low -- but years ago it was like 3-4%). BUT, they will not give you more than the cost of in state tuition and fees (that they would have covered if you went to school in-state). So, in my example, they will not give you more than $18K (b/c that's my assumption of Va. in-state tuition). Now, if tuition didn't rise AT ALL from today's rates, and in 10 years the cost of tuition in VA. is still $11.5K (HIGHLY unlikely), then they will only give you that amount even though you paid $13K for the year of tuition. They will tell you if it is in your best interest financially to transfer the value of your VPEP (pre-paid) to a VEST (savings plan) and there is no cost or penalty to do so. Perhaps this would be a benefit if you are going to an out of state or private school that costs LESS than Va. in-state tuition (maybe a trade school or something). Then you could transfer your VPEP to a VEST and you could use it in smaller increments to pay school expenses (like pay $5K for tuition each year and have some left over). There is no cost or penalty to switch to a VEST -- you just aren't getting the risk/reward of investing for 10 years. Here's the link and the actual policies of VPEP. http://www.virginia529.com/documents/vpep/vpep_benefits_guide_2011_2012.pdf |
Anonymous
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13:13 here again. I wonder if the PP is using the word "penalty" when s/he really means that you will not get a "year's tuition prepaid" if you go out of state b/c the out of state tuition is more than VA- in-state tution.
Your $13K contract in prepaid tuition is going to be given back to you (with a bit of interest) if you want to go out of state. Of course, that is probably not going to cover out of state tuition. It would cover IN state tuition ($18K in my example). So, I guess you could call it a "penalty" that you are getting back the value of $13K (plus interest) rather than the actual cost of tuition at that time ($18K). But, it's not like you are "losing" any of the money you invested in the prepaid plan. The value really comes from using the instate schools, but there isn't a true "penalty" or loss of purchase money. If you go out of state, you have lost the time to invest the money in other ways. You still have the original value. |
Anonymous
No, it is not specific to VA. In general, if you convert prepaid back to cash, you don't do as well as if you never bought into the prepaid. (Yes, the word "penalty" is used here loosely. I don't mean an actual penalty, but rather that the value they give you in cash will not be actuarially fair. So, to the person who went on, and on, and on.... OP you can read all that, or you can just follow my advice and read the fine print carefully. If this still isn't clear, get a professional to help.) |
Anonymous
MD was the exception to this rule, at least when we bought (and I am a different poster). In MD the rule when we bought was that they would give you the full tuition cost for UMD College Park* if you decided to go to school out of state (or in-state private). That is essentially no penalty for going out of state and much better than things like the Independent College 529, where they give you something like actual investment returns or 2%, whichever is lower. However, I have heard that MD may have changed this and I have been meaning to try and investigate whether they did, and if they did whether they are going to try and apply the new rules to people who bought under the old rules. Worst case though I think they would probably let you roll your prepaid investment account into the personal college savings plan. *Technically they promised to pay you the average tuition for all students enrolled at 4 year colleges, but since College Park has by far the largest enrollment it essentially worked out to be the same as College Park tuition. |
Anonymous
| And this is why we did VEST... |
Anonymous
| Where are you getting your info that Maryland has changed their policy of allowing the prepaid to be used at nearly any college anywhere in the country? If you look at the current policy online there is absolutely no indication of this. Currently you are able to switch your funds between prepaid and investment accounts as well. Our financial planner thinks the prepaid is a great deal and encourages the purchase of it even if you don't think your child will go to an in state institution. |