Having saved for my children’s education both ways, I can say with no hesitation that a prepaid plan is the best way to go. The difference is pretty simple. There are tax issues with both, and I’m pretty sure they will vary from state to state.
With a 529 Savings Plan, you make deposits into a plan you have set up in both your name and your child’s name. The money is invested and can either gain or lose money depending on the market. The amount you deposit is up to you. You can have automatic withdrawals or send checks or both. This makes it easier if your income isn’t steady or if your budget is tight. You can open a 529 Savings Plan anytime you are ready.
With a prepaid program you pay the average cost of four years of instate tuition based on the tuition cost of the year you enroll your child. The earlier you start, the better it is all the way around. Tuition only goes up, and the longer you have to pay for it the smaller your monthly obligation will be. I can’t say about other states, but here in Michigan you can only enroll in the MET (Michigan Education Trust) program at certain times, and I don’t believe that it opens up every year.
We started late, when our oldest son was in the fifth grade. It was really hard on us financially, so we simply were not in a position to enroll our two younger children in the program. We were essentially paying three private school educations, my college tuition, and our oldest sons college tuition at the same time.
But now, he is a Junior at Central Michigan University and all we’ve had to pay is his room and board and books. Current instate tuition is $9720 per year. We paid for all four years of his undergraduate education for under $20,000. Essentially, we are getting his education for about half price.
We opened 529 Savings plans for each of our other two children. Because we were not forced to pay a certain amount each month like we were with the MET we had for our oldest, and because we were stretched so tight, the plans never grew like we had hoped. We cashed in our son’s plan last year when he started attending Oakland University. It paid for almost a semester.
Our daughter’s 529 plan will be cashed in soon, as we will be sending Western Michigan University tuition payments starting in a few months. It’s a good thing, too. In 2008 alone that 529 lost $760. It is tied to the stock market, remember?
If I had to do it over again, I would have enrolled all three of them at the earliest possible date. It would have been difficult at the time, but now, it would all be behind me. As it is, I can look forward to many more years of college tuition.