So, Liam's almost 6 months old now. We've been feeding him cereal for a little over a month now, but we finally decided veggies were in store. We decided to start with carrots. Thinking we'd sneak them in after a half bowl of barley, he caught on quickly and showed just how much he didn't enjoy the taste change. Luckily he's scarfing them down now!

A couple of weeks ago, I brought to light the rather astounding cost of sending my child off to college in 18 years. To recapitulate, the average tuition increase for public universities is 6% per year compared to the current rate of inflation at 2.42%. Doing some basic math (or using an ), this comes out to roughly $170,000 for a 4 year education. In that article, I brought up a couple of options for college savings. For the sake of research, I have decided to look into and compare UGMA/UTMA accounts to the aforementioned 529 Plan.

Let's begin with a rehash of what a 529 Plan is. Per wikipedia, a 529 Plan is described as an "..investment vehicle designed to encourage saving for the future higher education expenses of a designated beneficiary". There are two distinct types of 529 Plans.

1. A 529 "prepaid" plan. This allows a person to buy tuition credits at "today's cost". These credits are in turn used in the future to pay for education expenses. Texas had/has a plan, called the "Texas Tomorrow Fund", that allows this. Unfortunately, as of today, enrollement for this fund is closed.
2. A 529 "savings" plan. This savings plan is contributed to and in turn, with market performance, returns interest to the account. What makes this account different from a regular investment account is that earnings on the account are not charged capital gains tax. The downside is that since this is based on market performance, the 8% return we need to realize our roughly $170,000 is not guaranteed. Although, if we are lucky, it could be significantly higher. Though this is doubtful due to the rather conservative nature of the fund's investments. I don't want some schmuck investor get risky with my kids college fund!

Alternatively, there exists a different type of "savings" account for use with higher education expenses. Commonly lumped together, the "Uniform Gift to Minors Act" and "Uniform Transfers to Minors Act" are not actually savings plans, but rather a set of laws drafted to allow for gifts (money) to be "made to a minor without requiring the presence of an appointed guardian for the minor". Of note, the UTMA is actually an extension of the UGMA.

Now, on to the nitty/gritty. UGMA/UTMA or "Custodial Accounts" only allow for $12K/year ($24K/year per couple) to be counted towards tax credits. Meaning that if you got a whopping $50K bonus that year and wanted to contribute all of it to your child's "Custodial Account", $26K of it would still be taxable. Contrary to the 529 Plan which the contributions are $60K/year or $120K/year per couple.

Another kicker is that with the "Custodial Account", only part of the earnings may be tax-exempt. Meaning you might still have to pay capital gains tax on a portion of it.

Doing a direct comparison, it really looks like the only benefit of the UGMA/UTMA "Custodial Account" is that of use. When the benficiary turns 18 or 21 (depending on State of residence), they are awarded the money and can use it as they see fit. This wound up being the proverbial "straw", as Sherri and I will be using the money as a reward, rather than a "free gift".

As for us, we have decided to stick with the plan outlined in the original article. We will be contributing $200/month into an INGDirect "Orange" savings account with APY of 4.5%. After 18 years, this will leave us with roughly $68,000, of which $23,700 of it will be earned interest. As well, we will be contributing $350/month to a 520 Plan "savings" account. Provided we get an annual return of 8% on that money, after 18 years we will have the $170,000 it will take to send Liam to school.

I sincerely hope this helps summarize some of the options available when making the not-so easy decision to invest in college fund(s).

For Now,
-M

Until recently, the extent of my money savings and investment was the meager 6% (5.5% Matched) to my company's 401k. What I had not taken into consideration, however, is how to make sure my kiddo will get their proverbial foot in the financial door.

Do not mistake me. My child (we will use the singular form as there is only one currently) will not be spoiled, spoonfed, or otherwise have his life handed to him on a silver platter. I do, however want to make sure that he has his education paid for. I was not fortunate enough to have this done for me, and while I still turned out pretty good, it would have been nice not to have $20k worth of student loans for only 2 semesters (yes, you read that right, 1 year).

Sherri and I have decided to look into State and/or Federally backed 529 College Savings Plans for the little Sprout (He is due in 4 weeks). Additionally, we are toying with putting $200/mo. into a separate account that we will roll into multiyear CD's annually.

Until the past week (I know, late bloomer) I was under the impression that the $200/mo. would most likely cover his tuition. I was ecstatic. Under the impression we would have a significant sum of money left over when we finally ship him off to school. With dollar signs covering my eyes, it was easy to picture the brand new 2025 year model Tige boat.

Much to my dismay, I was forcibly whipped back to reality this morning. I decided to get off my duff and do some in depth research into college tuition and savings plans. According to several ^{1 2} reputable plans, college tuition rates are growing faster than the standard rate of inflation. In some cases, 6-7% annually. I decided to use the College Tuition Calculator on the Enterprise529 website just to get an idea of what the monthly/yearly/total costs might be.

I chose the state of "Texas" being as that is where I "hang my hat". Then selected the University of Texas (Wife is an alum. I am a wannabe). Picked the "In-State tuition option" (see explanation above). Assuming he goes to school at 18 and spends 4 years, I have used all of the default criteria, sans the "Amount currently available for investment" where I selected $1000.

Now, given the average increase in tuition costs this "calculator" estimates that it will cost Sprout a total of $169,668 to attend college for 4 years. If I add up the $200 monthly and contribute it to a 5 year CD with a decent return (4.7%), this leaves us with roughly $68,744.37 after 18 years. As you may notice, this is significantly less than the projected $169,668 it will cost.

Analyzing the investment schedule provided by the College Tuition Calculator, it would cost roughly $357/mo. with $1000 down to accumulate the $169,668 needed. Even then, this is a with a theoretical return of 8%.

So, now what is the answer? There isn't a specific answer. I suppose the "lesson" is to do as much research as you can, and make your decisions wisely. Speak with a financial advisor if you must, because some of us just cannot grasp the concepts involved.

We have decided that the best option is to do both. Sure, it will be the cost of another vehicle monthly (payment + insurance + maintenance), but it is man than worth it to offer my child the opportunities we were not afforded.

Of note, we have made the decision not let him know about the "other" accounts (CDs). He will have to get a job and pay for the supplementary costs of college (room/board, transportation, etc...) on his own. Once he graduates, we will pay him back by giving him the money we put back for that cost. This should provide him with a nice nest egg to start his own life with.

Plus, if he decides that school is not for him (as was the case with myself), we can look foward to that new boat in 2025 AND maybe a nice motor-home to go with it.

Keep an eye out for the second part of this article that will be coming up in the next couple of days. I will compare/contrast the 529 College Savings Plan and the UGMA/UTMA "Trust" accounts.

For now,
Mike