Begin panic over college savings now...

Here's a little digression from cute pictures to talk about saving for college- skip if not your thing. Thought it might be helpful to other new parents who check this out, and maybe a starting point for sharing ideas.

Four years at my alma mater, Dartmouth College, for Calista in 18 years will cost from $350,000 - $500,000 just for Tuition and Fees - not counting room and board, books and supplies, personal expenses etc. The low end of the range is assuming 5% increase in cost per year, the higher end 7%. Prices went up 5.9% this year on average for four year private colleges. Ouch.

I've spent a lot of time slogging around in info on 529 plans and the like. 529 plans are for saving for higher education - the old ones were prepaid tuition only, but now there are lots of plans that you can use for any school and are just investments. The great thing about 529s is that your investment grows tax free, which can make a huge difference. Lots of other perks to, like being able to use for a different family memeber's education. For some bizarre reason, they are offered by individual states, with different fees, underlying investments and the like. Check out the overview at http://en.wikipedia.org/wiki/529_plan

Here's what I've figured out so far, I'd love to any feedback from anyone else looking into this. Check things out on http://www.savingforcollege.com which I found helpful. They will not, however, recommend an actual plan or state which is annoying.

If you live somewhere with a state income tax and your state fund offers a state income tax deduction, then it makes a lot of sense to go that path. However, here in California we don't have that. So, what to do? There are multiple options offered by all states. Here's what I'm doing - I don't have SEC licenses so don't take this as official advice, just my thoughts on what we did.

The basic parts I went through were: First, avoid Advisor sold. No reason to pay additional fees. Second, make sure fees are reasonable. Losing a percentage point to fees is absurd. Third, what are the underlying fund comapnies you can invest in? There are a range of fund companies including Fidelity, Vanguard, Putnam TIA-CREF and others. Finally, what are the investment options? There are all sorts of things ranging from index funds to age based plans that automatically reallocate as the child gets older.

I wanted to be able to do all equity, with the lowest-fee index funds possible. Just to compare, Fidelity's Arizona 529 can max out at 1.09% (min 0.72%). Ohio's Vanguard plan is 0.33%. These numbers combine the state program management fee along with the underlying fund fees. You have to be pretty confident that your Fidelity picks can outperform your Vanguard index options by 0.76% per year for 18 years...given that less than 20% of actively managed funds beat the index over the past 10 years at all, let alone by a percentage point, I'll go with the index. I also have an irrational dislike of TIA-CREF, which I think comes from helping Brisen invest her 403B (the non-profit 401k) in a bunch of bizarre options.

Now, as I'm narrowing in on states with Vanguard funds, which one? Comparing Nevada to Ohio for example...Nevada program fees are between .50% to .70%. Compared to Ohio's .33% that is a no-brainer. The annoying thing about these is that there doesn't seem to be a way to link it directly to your regular Vanguard account, at least not yet. Perhaps it will change?

Anyway, you can compare plans at the site I mention above. Keep in mind too that if you are putting lots of cash into 529s that it counts as a gift, so you need to keep in mind the $12,000 per person gift tax exemption limit ($24,000 per couple, but then you need to fill out a gift tax form).

After comparing lots of plans along the dimensions I mentioned above, we went with Ohio's plan. I went with an all-equity option - I plan on reallocating manually as I get closer, and with an 18 year time horizon I'm comfortable with more risk to get all equity returns.

We went with:
Vanguard 500 Index Option
Vanguard Developed Markets International Stock Index Option for some international flavor

Let me know if you have any other ideas, thoughts, arguments and so forth!

Check it out at:
http://www.collegeadvantage.com/