Thursday, August 12, 2010

Prepaid College or Educational Savings Account. Which is Best?

For the past 10 years I have been paying into a prepaid college plan. Every month I have been sending in $61.38. Saving for college for your children is a necessary expense I am glad to do. But I have thought if  I have been doing it the best way. What are the options for saving for college?
  1. Prepaid College Plan.
  2. Educational Savings Account or 529 Plan.
  3. Scholarships 
  4. Loans
  5. Win the Lottery.
On examination Prepaid college seems the safest of all the plans. You pay a small amount every month and your guaranteed a 4 year college education. I sleep very well knowing its taken care of. The math works out that I pay $61.38 for 216 months. Which is a total of $13,258.00. That monthly amount was 10 years ago. Today's payment is $125 for the same thing. The tuition covers classes in a 4 year state college. It doesn't cover books, room and board. I have one in college now, I know I'll be able to cash flow those expenses in 8 more years. 
The 529 plans is the second option. It consists of making monthly or lump sum payments into a state run account which contains a basket of mutual funds as an investment. The idea is to make around 8% on average and just let your money grow. Here we have risk entering into the mix. This keeps me up at night. Will the investments make the 8%? What if there is a market turn down and your balance is reduced by 1/3. Scary. But on the other hand what if it makes the 8%, then your golden. If I took the same $61.00 and invested for 18 years, how would I do? 
Here's the graph of  saving $61.00 a month for 18 years with a 8% average rate of return. Not bad. Almost $30,000 a nice 18 years work. I would of made almost double than my prepaid college. That would pay for a lot of college. If you got this far you would want to move to a money market so you would not be exposed to market risk. 
Scholarships help pay for some or all of your college expenses. You could have a high GPA and get an academic scholarship. You could be good in sports and get a sports scholarship. Depending on your field of study many corporations and public sector entities will pay your way through school if you promise to work for them, after you graduate, for a period of time. According to Scholarships.com there are over 2.7 million scholarships from local, state and colleges available. You should apply to as many as possible till you have the money you need to go to college. 
Another way to pay for college is Sallie-Mae Student loans and private lending loans. This is when you haven't saved anything or just were planning to finance your college education. Depending on what your going to study you could be taking on debt from $20,000 to $200,000. This choice doesn't sound to good, to paying loans for many years to come, there's got to be a better way.
Saving for college has become complicated. But by the numbers the 529 seems the way to go. But risk wise prepaid college is better. There is no risk involved with that choice. I believe a combination of the 2 would be appropriate. I should start a 529 for the remaining 8 years. Saving $100 a month to cover the other college expenses.
Not bad for 8 years. This shows that I'll have enough to pay for room, board and books. About the amount as the prepaid. Should of done this 10 years ago. This plan gives me more options I feel I have more a stronger foundation to stand on. With this plan, college should be not a problem and I'll probably be able to sleep at night.
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