Pa college plans

I am considering investing in the new Pennsylvania 529 Plan for my 7 year old daughter but am also interested in the alternate pre-paid tuition plan (TAP or Guaranteed Savings Plan) that the State offers. Apart from the tax advantages associated with the 529 plan, what are the disadvantages of the pre-paid plan and which would you recommend?

I haven't really looked at the PATAP-IP with Delaware although I have heard some negatives from others regarding the fee structure and performance history of the underlying funds. That is second-hand, but as you consider a savings plan you might want to review those aspects of the IP and compare with the expected back-end tax advantage.

The GSP is actually a savings plan and not a prepaid, although it functions much like a prepaid in that the return is directly pegged to tuition inflation. The GSP, at first look, is an excellent option for PA residents - particularly if you think that tuition inflation may exceed the return that you could get in the equity and fixed income markets, and if you like the security provided by the plan's guarantee (and are, perhaps, willing to give up some potential return to get that security). But like prepaid plans around the country, the PATAP-GSP has been having a tough go in this investment environment maintaining a sufficient return and reserve to cover its projected future obligations. This has resulted in a series of changes this year to the plan, including the addition of an annual fee and a more punitive cancellation policy. These changes are detailed at the plan's website and in its disclosure documents. Further changes can be expected. The GSP may reinstitute premiums to the purchase of tuition units. There may be changes in benefits. It is all very fluid right now. Some true prepaid plans have closed - at least in part (see CO, for one), or are discussing closure (see FL, for on), or have instituted significant purchase premiums (OH and WA, for example). So, if you are involved in an installment purchase f the GSP your contribution stream would be chasing not only an increasing tuition price but also uncertain premium which can be raised (or lowered) at any time. I think if PATAP-GSP is not compelled to make any additional changes over what has happened this year, it will remain a very viable and attractive option for PA residents. But there is risk involved, and a different sort of risk than that associated with asset allocation plans.

Hope this helps.

TJ