Dh and I have a mutual fund for ds's college (he's 5). We have a good chunk in there (75K) that we inherited and decided to save for ds from my mom. It is doing well, it is a slow fund but secure. Anyway...

Ds's tuition runs around 6K yearly. We've broken that amount down into 12 payments, and every month around $550 gets taken out of our checking automatically and goes into his mutual fund. Then when is tuition is due 2X a year (they let us split it) we request a check to be sent to us for that amount and we pay for his tuition that way. We also contribute $50 a month extra for his fund as well.

So we are using his tuition money to create money as well. But then we are digging into it to pay the tuition every 6 months. Dh said that yes, we are eating into the money but we still are farther ahead since the base amount is a good chunk.

We are totally sold on the idea of a mutual fund for ds's education. We started it from before I was pregnant and I like the idea of ds not taking out student loans. I am also not really keen on the other types of college programs - since - of course we 110% advocate college and make it as a 'given' but there are kids out there that Don't attend college for whatever reason - and Then what would happen with the $?

My cousin's are perfect examples. They are the same age as me (43) so this wasn't in the dark ages! I have five cousins in the same family (siblings). They live in the Washington D.C. area. My aunt and uncle are wealthy. They encouraged, advocated, you name it they fully supported each and every child to go to college. They, however, had other ideas. One became a air-brush artist and is quite known in the area. He is doing quite well. He had no desire for college and he was lucky. Another cousin got a job in the government with no college education. He worked himself up, and now at 50 is retiring with a full pension! The other siblings have similar success stories. ANYWAY, even with full support it is not guaranteed 100% that our children will Want to go to college and what about all that money in designated accounts? Then where does it go to? Some might let you use it for other things but I imagine you'd pay a hefty penalty? We didn't want this to happen to ds's money. If he doesn't use it for college, which we fully expect him to, but if it doesn't happen for some reason WE want to be able to use that sizeable amount ourselves and not have it tied to his name!

Anyway, to get back on topic, Are we making more money using the mutual loan than another method of saving for ds's tuition (presently)? Or are we just robbing Peter to pay Paul? Like I said, the fund is seemingly slow moving but has an excellent track record. It is slow but very steady and doing well. Thanks for reading such a long post.

I read your post early this morning and have been thinking about it ever since.

I'm not sure about how the education savings plans work in the US but from your description it sounds like you are doing the right thing. What a great way to use the money from an inheritance; to honor the people who died by putting it towards the future of the next generation.

If you were in Canada, I would recommend putting any new deposits into an RESP (Registered Education Savings Plan), only because the Canadian gov't will add 20% to whatever you put it up to $2500 a year per child. That's a lot of free money! And if the child doesn't go to university or college, the money can get rolled into either parents RRSP (Registered Retirement Savings Plan ~ I think what is equivalent to your 401K). But then the 20% gets paid back to the gov't.

They are also very open to all sorts of post secondary education that it can be used for .. including trades like plumbing or carpentry, gas fitting, or specialty things like language courses, or photography classes. When the child draws on the money, they are the ones taxed on it (not us) and their marginal tax rate is a lot lower because they are a student so most of the time, with tuition and other credits, they end up not paying any tax on it at all.

As for the educations savings plans in the US ... I'm not sure what the benefits are but I'd be curious to hear from other people the advantages and disadvantages including what happens to the money if the child chooses not to go to school.

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First of all, with interest rates so low, ALL investments seem to be slow moving right now. However, because your son is still so young, perhaps you may want to put some of that money in a more aggressive mutual fund. Yes, it is higher risk but you also have time to re-cover your earnings and transfer the money into a lower risk vehicle as his time to go to college gets near.

Secondly, I wouldn't make any decisions about other investment vehicles YET because you don't have enough information. DO get the details on the other plans. Read them thoroughly and keep tabs on the legislative changes that happen which might cause you to change your mind (one way or another). Do remember, there are tuition savings plans out there that can be used for elementary school tuition as well! Tax benefits only contribute to how much you can save.

You are soooooo smart to be looking into this now. Way to go!

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"I've been rich and I've been poor but independently wealthy is where it is at."

You are so smart to be doing this now. If I were you, I would get the advice of a financial planner who is paid by the hour (rather than trying to sell you something.) If the planner doesn't have an interest (sales) in what you do with the money and is well respected/recommended/qualified, then it would be a good investment in your child's future for a one-off meeting with one.

Very wise advice.

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What has your rate of return been in that fund?

I put your numbers into the quick "college" calculator on Quicken. I put in $75000 as your balance. $7200 contribution annually. 1 year until school admission and 16 years of tuition to be paid.

If I put in an 8% yield, it said you are good for $11936 per year.

Even if you are only getting 4%, it said $10162 per year tuition.

that's not even inflating contributions which makes it slightly more. Of course, college won't be as low as his tuition now so that may balance out since you will be accruing more in the next 12 years.

Way to go!