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[quote=Anonymous]One issue is which plan offers the higher return on your monthly investment. The 509 will pay you market rates on stock investments, minus a cut for the investment manager, and in MD these are target funds so the mix of stocks shifts towards bonds (safer but usually a lower return) as your kid nears college age. The pre-paid plan has an implicit rate of return that gets you from your monthly investment to the UMD tuition. Generally, state pre-paid plans use conservative assumptions about rates of return (i.e., they assume a low rate of return on your monthly contributions) and what tuition will look like when your kid is old enough to go to college (i.e., they may assume a higher tuition rate in 2026 when your kid is 18 and headed to UMD).

So, in theory, you could make the same monthly payment to the 509 plan as you would to the pre-paid plan, and have more money (some left over for grad school?) when he's 18. Or, the market could tank (although the 509 plan phases into safer bonds as he gets older) and you could be left with less than the pre-paid plan.

Another way to put this is, with the 509 you tend to take on the potential risk and reward, while with the prepaid plan you mostly eliminate risk in exchange for knowing that you'll be all set when he's 18. In the past, the 509 was seen as a better deal because stock returns were assumed to be higher than the conservative (low) return built into the pre-paid plan. However, who the heck knows what stock markets will do in the future, I sure wouldn't want to advise you on this.  Also, there's a value to knowing that you're all set, too.

Another potential downside is what you do if your kid decides he doesn't want UMD (his chosen major is better elsewhere, for example). [/quote]

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