If the child is the owner of the asset, then for college financial aid purposes this will hurt compared to the expected contribution if it were a parental asset – 35% vs. 5.6%.

In any event, we put $2000 into a Coverdell for our daughter the year my wife was unemployed about 6 or 7 years ago because we were below the limit. We have absolutely no expectation of receiving financial aid, so we’re not concerned about ownership issues.

My father pointed out to me that if you’re over 59 and saving for, say, a grandchild’s college, you can also use a regular Roth IRA.

So My plan is to use the Coverdell IRA for each child up to $2,000 / yr and then supplement with 529 plan if needed.

Anyone else have this strategy? Comments?

I think the key point that people have to remember when signing up for any prepaid plan is that you are entering into a contract. A contract by definition has two sides – what the purchaser is paying and what the seller is going to provide in turn. You cannot expect that the return the purchaser is going to get will be overly slanted in the purchasers favor. How could that be? This is probably a good part of the reason most of the plans have failed – what they were promising and how they went about delivering caused a very high amount of risk to do it. The objective of the plan should be what the original intent was – a long-term low-risk savings vehicle. In that, purchaser is going to have to make concessions to get the benefit of it. You cannot have a plan which says 1. put your money in for as short a period as you like, 2. you can take all your money back at anytime and you are guaranteed to get all your money back and outsized gains, 3. we’ll let you use the money at any school you like, 4. we’ll guarantee that the money you take out is going to keep pace with the tuition increase at every school in the universe. Come on – that is not going to happen. There is a risk profile and the schools and states do risk analysis to determine how they can guarantee the return today of something being delivered in 5 to 18 years. I think that maybe the people who are looking for such a thing take an intro course on investing, what options and futures are, and maybe look at how airlines hedge their fuel purchases to gain a better understanding of what they are purchasing/protecting.

I am a very big proponent of MA U.Plan since we began participating in it 7 or 8 years ago because it is a sound program, was one of the first, very clearly states what the purpose/goal is and what the rules are, and is able to deliver because it has an extremely conservative risk profile. You can’t come along and say “well, I’m not guaranteed to get all my money back with at least 5% annual interest, when I want, to use any way I like”. If that’s the case, then don’t enter into the contract. If your first thoughts are “I don’t want my child to be locked in to this set of schools” – don’t sign up. I am continually amazed on other message boards how people so easily write off a plan or are experts because it is not meeting every single one of their criteria for the ideal plan you’d get in utopia. At the same time, they’re sitting there looking at the money they’ve thrown into their favorite 529 state plan which is worth 30% less than all the contributions they’ve made and believe they are experts on the subject.

For those looking to get into prepaid plans now, if you’re looking outside of MA or the Independent 529 I think you’re at a severe disadvantage because of premiums now being tacked on (Independent 529 in fact has a stipulation that member schools give 0.5% discount per year) and how the plans have been rejiggered (and still only a couple with a guarantee). There is definitely a follow the herd mentality, and the wave of interest now is great because all of the sheep have been led to the slaughter previously. Through 2009 the planners have flooded the media indicating people should seriously consider putting their money in prepaid plans – these are the same advisors that told everyone to buy the 529 savings plan. They and their followers have all missed the boat.

Everyone knows that tuition rates are going to be going up more/faster now because of cut budgets, reduced endowments, and reduced aid. If you cannot make the concessions needed to take full advantage of a prepaid plan, then the message is no different than in the past – don’t enter into the contract. Plain and simple. Like any other investment, you need to be in it long-term, and be in a position to take advantage of the benefits you are purchasing. The downsides are irrelevant – either you do not understand the benefits/tradeoff, or you are looking for something that doesn’t exist, nobody is going to have the ideal product you are looking for, and you are simply wasting your time – you may as well just keep your money in CDs and you’ll come out ahead for what you want.

Your last statement is the key message and it’s no different than the way things have always been – buyer beware. There’s really no “getting burned” – if you break a contract, whether here, or in any other deal, you have to pay for breaking the contract. Plain and simple. When you first enter into the contract, the plan is making room to make the guarantees to you being promised. If along the way, you change your mind, the assumptions and money/return which the plan estimated coming from you so many years into the future are eliminated and need to be compensated for. Why would anyone think they can break a contract at will, deprive the seller of what the purchaser has promised, and believe that they have no obligation or reason to pay a fee for breaking the contract and be able to get all of their money back? These are the same people who pay $175 to go and terminate a cell phone contract. It’s no different. If you buy a CD from your local bank and decide before maturity you want your money back, you pay a fee and may get less than your purchase amount back – no difference. If the purchaser cannot live up to the terms of the contract being entered, then there’s absolutely nothing wrong with paying a penalty – and it is all stated very clearly in the contract. So, again, I personally cannot understand what some people get so worked up over on the subject.

Understand what you are purchasing. If you cannot, or can’t agree to it, then why put your money in it to begin with? At the same time, don’t complain that you’re upset because no prepaid plans meet every requirement that you’ve set and you can’t get the returns needed to guarantee attendance at the school of your choice.

The Massachusetts U.Plan looks pretty good. One risk associated with it is that if your child decides to go to school out of state, you get your investment back with interest determined by the CPI rather than tuition inflation. If tuition inflation outpaces CPI, as many people believe it will, you end up behind. But that’s not a huge risk. You’re also forced to choose a maturity date and you don’t receive any protection against inflation after that date, so you have to buy multiple certificates and ladder them. And you have a limited amount of time (six years) to use the money. Also, it is not certain that withdrawals will be free of federal income tax. They “are believed to be free of federal income tax as well,” is what the web site says; this is not technically a 529.

This reinforces what I said: you need to be very careful about what you’re buying. If you’re highly confident that your child will go to college in Massachusetts and you ladder your certificates carefully, the U.Plan is going to be great. If one of those assumptions fails to hold, you could get burned. Not badly burned, but still burned.

1. It only includes private schools in its universe. Average annual tuition of these schools is up in the $25k+ area. There are no public schools in the plan.

2. Things wouldn’t be all so bad if we were talking about a stable of the top flight well known private schools. However, the vast majority of the 200+ schools in the program are 2nd and 3rd tier no-name schools you’ve never heard of that just charge lots of money. For them, being in the plan is just a marketing expense and a cheap way to increase applications/enrollment – since they know plan participants will most often attend a school within the plan.

3. You can withdraw your money, however, your money can lose up to 2% a year.

On the plus side, the contributions/promise is guaranteed by the schools. So there is no risk that a state legislature will leave you high and dry.

We have our money in MA U.Plan which likewise transfers risk to the schools, but has a broader swath of public/private schools. MA does also provide a guarantee with the full faith and credit of the Commonwealth, though again, since the schools bear the risk in the plan, the state should not be in a position to ever have to deliver on that guarantee.

http://apps.leg.wa.gov/RCW/default.aspx?cite=28B.95.090

Yes, you can lose principal in the GET program. It’s not likely, but if it happened to you, that would be little consolation.

If UW tuition is deregulated, you almost certainly won’t be able to continue contributing to GET, or at least not at your current lock-in rate. Look at what happened in Texas: they had a nearly identical plan; tuition was deregulated; and the plan shut down to new contributions.

Furthermore, you can’t roll money out of GET and into another plan. I realize your GET contribution is guaranteed by the state of Washington, and they’re not going to simply confiscate it. But there are many things they can do to change the rules to make it difficult for you to use the money as you intended, especially if you intend to use it at a college other than a Washington public college or university. One thing they could do (this was threatened in Texas but hasn’t happened yet, I don’t think) is force a refund, which means you could actually lose principal because of the bid-ask spread you noted. It’s like call risk on a bond.

Yes, as a portion of a portfolio, I think GET is okay, and hey, you could . But if you want something pegged to tuition, google “Independent 529,” something I didn’t discover until after finishing the column.

Pops, what else would you like to know?