twenty months later...

Today I successfully created our little dude's 529 college savings plans. Since a lot of you have kiddos and are probably in the same boat (worried about paying for that education!), I thought I'd share some of our thought processes going into what we decided.


First, as a disclaimer, I want to say, I don't necessarily think college savings is mandatory. When I was college bound, somehow I knew I needed to pay for school myself. I worked really hard, got scholarships and Pell grants, saved every penny I made waiting tables during the summer, and I graduated debt free. Students don't need mommy and daddy to save the day and pay. I didn't.

That being said, Shane's folks paid for his education, so all he needed to pay for was room and board, books, play money, etc., so he feels entitled to give the same to Wesley. OK. It's not like I'm against paying for my kid's schooling. I just think it's important to let kids achieve what they will, and if that means keeping the money saved for another kid or giving it to someone else, so be it. I'm all about achievement!

So, what did we decide? We actually bought into two 529 plans -- Washington and Kansas.

I.

But first, what is a 529? A 529 is like a 401(k); it's a savings plan for education purposes specifically. Some key points about 529s (quotes from sites I consulted):

• "Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free."
  
  
• "You, the donor, stay in control of the account. With few exceptions, the named beneficiary has no rights to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked."
  
  
• "The best part: You can often start an account with as little as $25, and you can use the money in a 529 plan at any accredited college or university in the country."
  

Each state in the United States offers at least one plan, and for many states you don't need to be a resident of the state to apply -- or use it at a school in that state. So that meant we had, like, 50+ plans to look at and figure out if we wanted to sign up for them. A seriously daunting task.

My main guide was bankrate.com's "Saving For College" site, which rocks. You can select what features of the plans are most important to you, find states' plans that include those characteristics, and compare them side by side.

First, I looked up some of my "favorite" states, to see what they offered:

• Washington (prepaid units -- more on this later)
• Maryland (T. Rowe Price-managed investment fund)
• Utah (Vanguard-managed investment fund)
• California (Fidelty-managed investment fund)

Hmmm, a lot of these are managed by companies. Well, since my retirement fund is with Merrill Lynch, what state do they manage? Maine. We have a Charles Schwab savings account, what state do they manage? Kansas. Seriously, every firm manages at least one of these.

II.

So second, I thought I'd figure out what the different types of plans were. What did this all mean?

The vast majority of 529s are savings investment plans, which basically means you put in $$$, a company or person or someone invests that money and magically (one hopes), you get a return. In 18 years, when little dude goes off to college, you can use your investment and the return for college costs, tax free. There is always risk in these investments, but they are also long term.

Other savings plans are CD-based. We looked into a few of these. With Certificates of Deposit, you are guaranteed not to lose your principal. If you put away $50,000 between now and then, you will at the very least get back your $50,000, but if you're lucky, you will get some return on that money. That's the goal.

Lastly, some plans are prepaid units plans, like Washington state. If it costs $75 to buy one unit at a university in Washington today, the plan will offer you the same unit for $100 (a 25% markup!), with the expectation that in 18 years the same unit will cost $150 or more, and you got it for $100. By buying the units now, you get a deal. Some of these plans didn't have eligibility requirements -- but Washington does. Investors have to be residents to buy into that plan (and fortunately we are! so it was open to us).

III.

So third, I thought: what is important to me? What do I want? I used the Saving for College site to look at enrollment fees (I didn't want to pay one), management fees (I found five different classes of fees, and I didn't want to pay any of them), and eligibility requirements.

Shane also chimed in: He was interested in overall return on investment. Which plans performed the best? What was the best deal?

For me, of the CD plans, the Arizona and Montana plans had no eligibility restrictions, no enrollment fees, no management fees. Of the managed plans, plans from Arizona, Illinois, Nebraska, Kansas, Oregon, and Texas all had no eligibility requirements, no enrollment fees, and minimal management fees (three of the five categories were free of fees).

Bankrate also announces the best performing 529 plans, and at the top of that list was Kansas, the plan run by Schwab. We were already kind of interested in that one because of our existing Schwab account. That further piqued Shane's interest.

IV.

The next step was to pick a few and get all the documentation and go through them with a fine-tooth comb. We determined it was OK to have more than one account. Why not have a CD, a "sure bet," as well as an investment account with better chances of interest and return?

We ordered materials from Arizona (three types of CDs) and Kansas. We downloaded the Washington prepaid-units information, too.

We were particularly interested in this Arizona CollegeSure CD, described on bankrate.com with this: "The interest rate on the CollegeSure CD is pegged to a private-college tuition index." Hmm, that was interesting -- a CD where the interest rate rises and falls with tuition rates? That seemed like quite a concept, and a good deal.

Unfortunately, we got all the paperwork and discovered it wasn't as good as it seemed. In fact, even though it was named a "CD," it was really a prepaid unit program! The CD terms were "guaranteeing" that at maturity, each "full unit of a CollegeSure CD will pay a sum of money at least equal to the weighted-average cost of one year's undergraduate tuition." When Shane crunched the numbers comparing Arizona to Washington's plan, Arizona charged almost double for the units! It made the Washington plan look much better.

For the prepaid-unit Washington "Guaranteed Education Tuition" or GET plan, you have two options. One, you buy units with a "lump sum" of cash whenever you'd like. The units are being offered for $101 today. Twice a year, the cost resets. I can buy as many as I want for $101 now, but when the cost goes up, there's no going back. My price is the current price.

OR, you can set up a "monthly custom plan," where you say, "every month for the next 10-15 years I'll buy two units at the $101 cost." You have a $202 payment DUE on the 5th of the month every month for the next 10-15 years (with a late fee if you miss it!!). And, not only that, Washington charges you 7.5% interest each month! According to my trusty calculator, that is $15 a month for a $202 payment, $217 total. It's like, Washington is "loaning" you that money and you're paying interest to them. Shane thought this was such a bum deal. Even though you get the magical low price of $101 forever, it's basically a loan and you pay a premium to keep that fare.

V.

Well, now that we were armed with knowledge, we:

• Opted to buy a wad of WA-GET units now.... and we'll basically let the 529 sit for 18 years. It doesn't require any management at this point.

• Opted to set up a direct deposit from one of our checking accounts into the Schwab Kansas savings plan. That's the one that'll be doing a lot of growing and changing, we hope.

It was such a big decision! Maybe that's why it took forever to do it. I feel pretty good about our decisions. Some of my other friends have the Utah plan, a guy I know who is a money manager always recommends the New Mexico plan to his clients, and another attorney I know said he doesn't like the 529 plans and instead is setting up a life insurance plan that he'll close when his kid goes to college! I guess the possibilities are endless. This is just how we went about it. I'd love to hear any of your stories. I'm glad we're finally set up!