http://agecon2.tamu.edu/people/faculty/nelson-gene/pfp/Falks_Education_Costs.pdf

From this article, tuition and fees to attend a Public 4-year University rose 5.6% annually from 2000-01 to 2010-11. From the Tuition Promise fund pricing index, Texas A&M costs $8505.68 or 72.05 Type 1 credits in 2013-14. At 5.6% increase, this amounts to $98,632.71 total from 2031-2034.

If one were to buy the required credits (300) at the 10-yr annual installment plan, the Promise Fund would cost $4,887.34/yr for 10 years = $48,873.40. You will have 11.8 credits left over - pass onto the next sibling or withdraw into cash for a fee.

If you were to make this same total investment annually over 18 years ($2,715.19/yr) in the Utah Vanguard Age-Moderate (7.72% annually the past 10 years), this amounts to $98,956.43 in 2030. Minus the annual cost of tuition from 2031-2034, you will have $14,644 left over in 2034.

On top of the actual investment benefits of the 529 plan, it is much more flexible:
(1) You can apply the 529 plan to costs outside of tuition/fees such as books, room & board, computers, etc. The Promise Fund you either pass on to a relative or withdraw for a fee.
(2) You can apply it equally to private or out-of-state schools. The Promise Fund has "transfer value" which will likely result in a loss.
(3) The Promise fund 10-yr annual installment requires the $48k to be paid over 10 years ($4,887.34/yr). The 529 Plan would depend on when you initially invest (~18 years) so it will be less of a financial burden ($2,715.19/yr).

It is of course wise to diversify the investment, but a 529 Plan seems to be the wiser choice and should be invested in heavier.

btw...I'm up for correction. This is just from my limited research and economic skills, and makes a general assumption that the future will resemble the past.

IMO, the Promise Fund is best used only with a lump sum payment...as not locking in the rate and/or paying a finance charge seems completely counter-productive. And I think should be supplemented by another plan (or really it should be the supplement to another primary plan).

I did a few credit years worth of credits when my two sons were infant/toddler. My monthly education investment goes to a traditional 529 (Utah). I may re-visit down the line another Promise Fund lump sum installment.


[This message has been edited by SJEAg (edited 5/20/2014 11:57a).]

You are subject to increasing tuition costs like everyone else if you buy lump credits a little at a time. Of course 5.6% average increase is better than 8% interest.

But taken to the extreme, if you buy 300 Type 1 credits (to take the example in the OP) in lump, it will cost $35,418 today. Place this in the Utah 529 Vanguard Age-Moderate @7.72% average, you will have $125,389 in 2030 and $50,234 left over in 2034 after tuition and fees.

I don't have time to do an extensive analysis, but I will restate that my experience has been very favorable with both the original program and this iteration.

As an example, we bought my daughter's program back in 2002 and watched tuition rates grow at 9.37% over the next 8 years before "tuition" stopped growing and college-specific tuition started getting added to the equation (Mays = an addition $34/hour on top of the $177/hr general tuition that has essentially been frozen since 2010). During that same time frame, the S&P 500 only returned 2.93% with dividends reinvested and it certainly didn't come with the assurance of a guaranteed outcome like these programs do.

When you factor in the college-specific tuition (which is the only thing you can do to keep this realistic since there's no way around those), tuition has continued to outpace inflation. The difficulty in comparing this to any given mutual fund or other investment vehicle is that those returns certainly aren't guaranteed unless you went with some low-yield bond.

I believe the college specific tuition is factored into the Promise Fund as well (72.05 units vs. May's 79.03). I do agree, though, that the Promise Fund has the added benefit of being "guaranteed". The above numbers make a big assumption that the future will resemble the past which nobody can know: tuition rates climb at 5.6% and Vanguard can produce 7.7%.

http://forums.texags.com/main/forum.reply.asp?topic_id=2283308&forum_id=57

This thread links to a few others on this topic.

I think the last two posts in that thread make good points. Can you produce 7.7% average over the next 18 years? Is tuition going to rise greater than 5.6% average over the next 18 years?

Nobody knows these questions. 529 is more risky, but more flexible & a better investment on average. Promise Fund is safer, but boring & restricted in many ways. It's good to diversify like any investment.

and that's why i'm hedging by doing both