Prepaid tuition plans are often described as "buying tomorrow's tuition at today's prices," since contributions are supposed to cover future college costs, regardless of tuition hikes.
But nowadays, prepaid plans can be best described in one of three ways, depending on the plan: 1) Pay more than today's prices and hope you're not overpaying for tomorrow's tuition; 2) pay at today's prices and hope it covers tuition tomorrow; or 3) don't pay anything because the plan is closed.
The trust funds relied upon by prepaid plans to pay benefits have been hit hard by the skidding equities markets. And state governments, strapped for cash due to lower tax revenues, have cut funding for higher education, which has led universities to raise tuition. So the operators of prepaid plans face the dilemma of covering costs rising faster than anticipated, with less money than expected.
Each plan has had its own solution. Some states, such as Ohio, Maryland, and Illinois, have increased prices, essentially adding a premium to current tuition. Other states may have to close plans to new enrollees, as Wisconsin and Colorado have. (Colorado, so far, is the only state to suggest it may not fulfill its obligation, and it's giving participants a chance to leave the plan before Feb. 20.)
So what should college savers do? "I think parents already participating should sit tight, unless the program seems anxious to get rid of them, like Colorado," says Joseph Hurley, founder of Savingforcollege.com. "Anyone looking to get into a prepaid program now should look closely at the pricing. It's getting tougher to justify the premiums being charged by some of the programs."
Also, contact the plan sponsor directly. Inquire about the financial status of the program, and find out what guarantee, if any, is behind the plan.
Finally, remember that it's important to start saving for college as soon as possible. If you were considering a prepaid tuition plan, but are now unsure, open a 529 savings plan and begin socking money away. You can transfer the assets to a prepaid tuition plan later, if you decide that's the best route for you.
Learn more about your options in our College Savings Center.