Are Prepaid College Tuition Plans Right For You?

When you have a kid, everyone says “it goes by so fast,” and they’re right. But when you’re talking about college savings, time is on your side when you start early. Prepaid tuition programs are exactly what the name implies: the chance to pay now and buy a certain number of educational credits/years of college at today’s tuition rates. Or so the promotional materials like to say.

Education:

There are several ways to save for the impending costs of college.  Some of the investment or savings vehicles that are available to taxpayers are as follows:

1.       Coverdell Education Savings Accounts

2.       529 Plans

3.       Prepaid College Plans or Prepaid Tuition Plans

In this lesson, we will focus on the Prepaid College Plans, which allow you to prepay for future tuition — typically at today’s prices. A popular college savings vehicles offered at one time in about 20 U.S. states are increasingly running on empty. Currently, only about 19 states still offer a variation of the original plan.  Massachusetts, Florida, Mississippi and Washington are the only four states that guarantee their plans through full faith and credit of the state, meaning that if the plan goes bust, the state has to pay the promised tuition amount. The Texas plan is guaranteed by the state universities and colleges.  The main issue with this savings vehicle is that the state sponsored plan could go broke before your child receives benefits.

There are pros and cons to prepaid plans. Let’s go through each.

Pros	Cons
Purchase tomorrow’s college education based on today’s costs – lock in future tuition costs	Must attend a college included in the selected plan to receive full benefits
Professionally managed	Often limited to use for only tuition and fees
If your child attends a state college or university, you will have gotten a good deal on tuition.	Not all states have plans.
Low contribution amounts accepted	Declining market returns
	Fees
	Plan may not guarantee payments when you need them in the future
	You could do better investing the money yourself in a college savings plan.
	Less control over account.
	You run the risk of your state becoming unable to back the funds.

 

The prepaid tuition plan is just another option for college savers.  Please evaluate all of your options before committing to a strategy to pay for your child’s education.

In the next lesson, we will discuss the tax incentives available to taxpayers to help curb the cost the rising costs of college.

Resources:

Mapping your future (https://mappingyourfuture.org/saving/programs.htm)  – for more information about Prepaid Tuition Plans.

Important terms from this lesson:

Term	Definition
Prepaid Tuition Plans	Prepaid tuition plans allow donors to lock in the future cost of tuition in today’s dollars.

 

Action Step:   Watch and Learn.

Watch the U Plan and learn about how Prepaid Tuition Plans work.