College tuition. It’s a scary thought for those of us who have children. The rising costs of attending college have been well documented. Meanwhile, many have resorted to massive student loans to make it through college, only to graduate to a weak job market with mounds of debt. Yet we also know that in our society today a good education will often help our children pursue their dreams.
If you plan to try to help your children with those costs, there are several alternatives available. One such option is pre-paid college tuition.
What is Pre-paid College Tuition
These programs are state-based programs. The basic idea of pre-paid college tuition is you pay for your child’s tuition today at today’s rates. The state government holds your money presumably investing it at something that produces a higher rate of return than college tuition inflation. Then when your child actually attends college several years later, their tuition costs are covered, possibly for substantially less than what tuition will cost then.
This sounds like a good option for saving on those spiraling college costs, but is it really a good deal?
The Colorado plan
Recently it was announced that Colorado is shutting down their pre-paid tuition program as of Nov. 1st. Notices were recently sent out to the 1,500 or so enrollees that the state had determined that the program did not have sufficient funds in order to meet the long-term commitments. Essentially, the state had failed to invest the money appropriately so as to keep up with tuition inflation and therefore there isn’t enough money in the fund to do what was promised and they had failed to control tuition costs to keep them at a sustainable level. As a result they are returning the money to the plan enrollees along with a maximum of 5.5% interest on the money that was in the plan.
The plan spokesman indicated that they had determined they would shut the program down now while they could still refund money that had been placed in their care.
Why pre-paid college tuition might not be the best choice
Generally, speaking I don’t think pre-paid tuition is the best way to pay for college. There are several reasons for this.
Covers tuition only
The first problem with these programs is they cover tuition only. By the time you add in room and board, books, and other expenses though, tuition may only be 50% of your total costs. You will still have to pay all those other costs when your child goes to school
Generally, you have to attend an in-state school to get the full benefit from these programs, and in many cases, you need to attend an in-state public school. What if you move out-of-state between the time when you purchased the tuition and when Jr. heads off to school? What if Jr. is accepted at an out-of-state school that specializes in the field he wishes to pursue? What if your child doesn’t get accepted by an in-state school?
May actually be more expensive
Some states base the pre-paid cost on an average of the schools within the state. But what if your child decides to attend one of the cheaper schools? You may actually end up paying more.
Rate of return
Basically, the effective rate of return on these programs is the rate of inflation on college tuition. Generally speaking you can probably find investments that would have beat the rate of inflation, though admittedly college tuition has been increasing at such a ridiculous rate that it’s closer than it should be. I suspect though that those folks in Colorado could have done much better than 5.5%.
While these programs claim to guarantee tuition, just ask the folks in Colorado what that guarantee was worth.
If a contractor makes you a promise to perform a service for a fee and they renege on their promise, you have legal recourse you can take. You have no such option with the state. In this case, kudos at least to Colorado for shutting the program down before the fund was insolvent, but they could have just waited and said “too bad your money is gone and we can’t pay the tuition”.
Becoming a thing of the past
Colorado is not alone in shutting down their program. Other states have done this as well, as more and more states have found they cannot carry through with the promises made.
A better alternative
I’m all for you saving to help your kids with their college education. I believe there is a great value in a college education and I think it’s great if parents can help their children get that education. There are better alternatives though than pre-paid tuition programs. Two much better choices are a Coverdale Educational Savings Account or a 529 plan. The Coverdale plan is good and gives you many choices as to how your money will be invested. You are limited though to saving only $2,000 per year. For that reason I prefer a 529 plan.
529 programs are state programs as well and they vary greatly from state to state. Some of these programs are definitely better than others. They all follow the same basic rules as far as how they work for paying your childs college expenses. There are considerable differences though in the options you have for your money while it is in the program. Some programs manage the money for you. Some allow you to select what is done with it. Some give just a few options. Some give many options. You want to choose a state plan that gives you as much flexibility in how your money is handled as possible. A good investment advisor can help you walk trough this. SavingForCollege.com is also a great resource for information on these programs.
Here is why I like 529 plans
- You can use any state’s 529 plan
- Your child can attend any college, anywhere they want.
- You are not limited to tuition only. 529 plans can be used for most college-related expenses.
- If Jr. gets a full scholarship somewhere or decides not to attend college you can transfer the money to another family member
- As long as the money is used for college expenses, all growth of the money is completely tax-free
- If you choose the right plan, you are in total control of your money. You don’t have to worry about some administrator deciding your program is no longer viable.
The bottom-line is I think 529 plans provide a safer, more flexible solution to saving for college than pre-paid college tuition programs.
Are you saving for your child’s college expenses?
Photo credit: shiladsen (creative commons)