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MD 529: Prepaid College Trust vs. College Investment Plan

As I wrote this morning, I opted for the Maryland 529 College Investment Plan (CIP) over the Maryland 529 Prepaid College Trust (PCT) when I enrolled and I did so for a variety of reasons. First off, the Prepaid College Trust is like prepaying and locking in the rates of a Maryland educational institution today but for use sometime in the future (at least three years in the future).

Can Only Enroll Beneficiary After Birth

This made the PCT impossible for me because we don’t have any children yet. The CIP lets me name myself as the beneficiary and then roll that over to my child when he or she is born.

However, let’s say I have a child and the PCT was an option, would I still do the CIP? Yes, here’s why.

1. PCT’s “Legislative Guarantee”

With the CIP, my after-tax assets are put into various funds that grow tax-deferred (tax-free if spent on educational expenses). The PCT, it’s like Social Security, I pay into a system that will put it in a group of investments that will guarantee I can get a payout when my child enters college. If there is a shortfall, then the Legislative Guarantee says:

… the Governor to submit a request for the Prepaid College Trust in his/her annual budget if the Prepaid College Trust experiences a shortfall in any given year. As with the entire State budget, this request would require General Assembly approval.

What happens if they don’t approve it? What if there is a huge shortfall and no way to fund it? Those are questions that I don’t see answers for and one of the fundamental problems I have with these sorts of guarantees (like Social Security). I’d much rather prefer to have an account with funds in it that I know is there and isn’t spent elsewhere.

2. CIP: Potentially Higher Returns

With the CIP, I’m banking on market returns on my funds that may be outpaced by the increasing costs in education. According to their math, the University of Maryland’s tuition and mandatory fees increased 90% in 10 years, or 6.6% each year. Johns Hopkins University increased 63% in 10 years, or 5.0% each year. Now, if your think the market will return 11% on average, you’ll want the CIP.

3. Flexibility Over Price

If you’re certain that a Maryland college is where your child will be going (and the Legislative Guarantee placates your concerns over future fundability), then the PCT is probably your best bet because it guarantees the cost. If you’re not so sure, the PCT’s value for a college outside of Maryland is limited to the “Weighted Average Tuitions” of four year colleges. The increase in how much they’d pay per year for a public college outside of Maryland was a paltry 1.6%; that isn’t that impressive considering they spent the first half of the PCT FAQ [3] telling us about the 90% in ten year increase in UMD’s prices.

Ultimately, the guarantee part was what concerned me but the Flexibility over Price issue was a close number 2. The potentially higher returns part wasn’t as big a factor as the other two but I felt is deserved some mention because ROI should always be on your mind when making investment decisions. Talk to a professional because you make any decisions, these are my opinions and I have little experience in this arena. 🙂

For those Marylanders (or outside Marylanders who are enrolled in either program) in 529 programs, how did you pick which plan to go with? For those who are thinking about it, what are the issues on your mind?