On a recent Friday my husband surprised me by coming home early -- and he caught me in the middle of some illicit computer activity. No, it's not what you think; I was actually looking at our state's prepaid tuition program.
He glanced at the screen. "Why are you looking at that?" he asked, striving for an even tone.
"Why not?" I challenged back. You see, for my husband, the "strictly the facts" guy in our house, 529 prepaid tuition programs don't make much sense, especially compared to 529 college savings plans. He sees all the cons.
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. But the truth is, you might pay more than today's tuition rates in the form of a premium, depending on your state's plan. Consider that for my husband and me to buy one year's worth of tuition (as well as mandatory fees) for our kindergartner in our home state of Virginia, we'd have to contribute $9,333 to the Virginia Prepaid Education Program. Yet a year's worth of tuition and mandatory fees at William & Mary (my alma mater -- go Tribe!) for the 2006-2007 academic year is just $8,490.
Indeed, there's a fair-sized list of cons:
- You could do better investing the money yourself in a college savings plan.
- Not all states have plans. Only 19 do, though there is also the Independent 529 offered by a coalition of more than 250 private colleges.
- Depending on your state program, if your child attends a private or out-of-state university, you may fall short -- only getting the sum you invested plus a small rate of interest.
- Compared to a college savings plan, you have far less control over your contributions.
- You run the risk of your state becoming unable to back the funds. Ask folks in Ohio and Colorado, where prepaid plans were closed to new investors because of concerns that the plans were underfunded.
- Prepaid tuition plans cover just tuition and usually mandatory fees, whereas the funds in a college savings plan can be used to cover books, supplies, and room and board.
But as in all stories, the cons are only half the picture. Here's the sunny side of prepaid college tuition plans.
- If the market tanks or tuition skyrockets, locking in a tuition rate will seem like a good plan.
- If your child attends a state college or university, you will have gotten a good deal on tuition.
- You don't have to make any investment decisions.
All of that is well and good, but if you've done more than a little bit of research on prepaid tuition plans, you'll know these pro and con lists are everywhere. What's missing from all the other lists is the psychology behind why some of us prefer prepaid tuition. Here's what you won't see on any other list. This is what I call "Elizabeth's Pros":
- I like the security of knowing my children's college tuition is getting paid for today. I may not be able to guarantee that they'll have clean underwear for school tomorrow or that I have everyone's favorite snacks lined up for the lunch boxes, but darn it, I can be sure they'll have a higher education. It just makes me feel better.
- I save more when someone is forcing me to do it. Think of it as a coach for your child's college education! Participating in a prepaid plan involves signing a contract. I can pull out if I need to, but it would feel like I'm compromising my kids' futures (or at least my ability to pay for them). Compare that to a college savings plan, which allows you to contribute -- or not -- whenever you want.
- When my nest empties out, I'd rather it be emptied into a college in the same state, somewhere within quick driving distance. (Conversely, our kids better go to college; we need the alone time.)
- With children ages 6, 4, and 2, I love for anything else in my life to basically take care of itself. All of my contributions to a state-run prepaid tuition program are pooled with others and then invested; it's out of my hands. And yet, when the time comes for our kids to attend William & Mary (no pressure), there the funds will be.
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