State College Plans vs. 529 plans

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Jun 4, 2008 1:29 pm

Are there any stark differences between the state college plans (which appear to be 529 plans) vs. regular 529 plans we do with fund companies?


Any reason someone would choose one over the other?
Jun 4, 2008 1:45 pm

Yeah, more or less.  Some are prepaid, and others are funded over just like 529 plans.

 
Jun 4, 2008 11:51 pm

Yes, there is a significant difference, and prepare to be enlightened.

 
My state's Prepaid tuition plan charges a 15.6% commission to purchase credits at today's price for future attendance....I kid you not....When I called when the numbers weren't adding up for a client, they literally said after I cornered them, "we have to make money too.". 
Second, there are substantially more restrictions when pulling your money if your child/children don't go to school.  You pay an extra 15% in penalties on top of the 10% the IRS charges.  There is also a 2 year waiting requirement if you want to pull your money.  Shouldn't be a factor for most people, but still is less flexible that your typical 529.
Third, the average rate of return on these things is the inflation rate of the cost of college, historically 5-7%, depending on which one you look at, which can be beaten handily by most 529 plans.
 
-Hope this helps.
Jun 5, 2008 12:04 am
rankstocks:

Yes, there is a significant difference, and prepare to be enlightened.

 
My state's Prepaid tuition plan charges a 15.6% commission to purchase credits at today's price for future attendance....I kid you not....When I called when the numbers weren't adding up for a client, they literally said after I cornered them, "we have to make money too.". 
Second, there are substantially more restrictions when pulling your money if your child/children don't go to school.  You pay an extra 15% in penalties on top of the 10% the IRS charges.  There is also a 2 year waiting requirement if you want to pull your money.  Shouldn't be a factor for most people, but still is less flexible that your typical 529.
Third, the average rate of return on these things is the inflation rate of the cost of college, historically 5-7%, depending on which one you look at, which can be beaten handily by most 529 plans.
 
-Hope this helps.
 
That is very good information.  I see that is for the pre-paid one.  The reason I'm asking is that I have a referral of someone who lives in Michigan.  I don't live there, so I have to figure out their plan since this client was told by Merrill advisors there that she should not open a 529 with ML, instead do the Michigan plan.
 
It wouldn't be the pre-paid one though.  It is the type of plan that is most similar to a 529 plan.  In a side by side comparison, I'm seeing the only differences to be possible state income tax deductions and cheaper fees on the investments.  Haven't looked at performance though yet.
 
Thanks for the information. 
Jun 5, 2008 12:13 am
snaggletooth:
rankstocks:

Yes, there is a significant difference, and prepare to be enlightened.

 
My state's Prepaid tuition plan charges a 15.6% commission to purchase credits at today's price for future attendance....I kid you not....When I called when the numbers weren't adding up for a client, they literally said after I cornered them, "we have to make money too.". 
Second, there are substantially more restrictions when pulling your money if your child/children don't go to school.  You pay an extra 15% in penalties on top of the 10% the IRS charges.  There is also a 2 year waiting requirement if you want to pull your money.  Shouldn't be a factor for most people, but still is less flexible that your typical 529.
Third, the average rate of return on these things is the inflation rate of the cost of college, historically 5-7%, depending on which one you look at, which can be beaten handily by most 529 plans.
 
-Hope this helps.
 
That is very good information.  I see that is for the pre-paid one.  The reason I'm asking is that I have a referral of someone who lives in Michigan.  I don't live there, so I have to figure out their plan since this client was told by Merrill advisors there that she should not open a 529 with ML, instead do the Michigan plan.
 
It wouldn't be the pre-paid one though.  It is the type of plan that is most similar to a 529 plan.  In a side by side comparison, I'm seeing the only differences to be possible state income tax deductions and cheaper fees on the investments.  Haven't looked at performance though yet.
 
Thanks for the information. 
 
Just guessing, but many states have their plan with a no load company, eliminating the broker.   This is the only way to get the state tax credit.  This is how my state works.  I am required to inform clients of the state 529 plan and the tax credit they give up to work with me.