Are prepaid college plans for you?

by Neal Frankle, CFP ®

There are a variety of ways to save for college. One option is to use prepaid college plans . But what are they and are they a good deal?

How Prepaid College Plans Work.

Prepaid plans allow you to pay today for the college education your child will get some time in the future. The benefit is that you pay now and are done with it. You don’t have to worry about future tuition fee hikes and you don’t have to worry about investment performance. Both of these seem like nice features. But are they enough to make prepaid college plans a good way to go? Are such plans the best college funding options? No. In fact, there are two major drawbacks to these plans.

Financial Strength

The first concern is financial stability. Over the last several years 10 states had to close their prepaid college plans. Why? Because their investment performance was so poor that they were underfunded by 30%. In essence, they were losing money on every new person that signed up. As a result, they stopped accepting new applications. My guess is that had the situation deteriorated further they might have gone belly up completely. These days, anything is possible.

In fairness, the plans that are still being offered have mostly recovered and most have full funding. But each plan is different and not all are backed by the full financial strength of the state offering the plan. That’s why safety is a major concern.

Today, only 10 states still offer these plans.

Let’s discuss the next major pitfall of these prepaid college plans.

Limited Benefits

The plans typically pay for tuition only. They do not cover books and housing costs. These costs can be substantial as well. Also, who says your protégée will attend the school you pick out? As I said, these plans are not available in every state and they aren’t available in every college. Here is a list of states that currently offer these plans:prepaid college plan

  1. Maryland
  2. Washington
  3. Virginia
  4. Florida
  5. Massachusetts
  6. Michigan
  7. Texas
  8. Pennsylvania
  9. Nevada
  10. Mississippi

Out of the thousands of colleges and universities in the United States, only 272 currently participate in these plans.
Before signing up for a plan like this, take a moment and focus on what role college may play for your children down the road.

As I’ve argued before, college may be a good experience but that’s not the main reason for going to school. Unless you have unlimited resources, the reason to go to college is to help better prepare your children for their economic future. Some people can get a great career without having gone to college. Your child may be one of them.

While it might be tempting to buy that college education at a steep discount, prepaid college plans are a gamble that you should not take.

How are you going to fund your child’s college education? Do you think a prepaid plan would work for you?

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{ 2 comments… read them below or add one }

Garron December 12, 2012 at 9:45 AM

I’m not necessarily a fan of prepaid college tuition plans, but I don’t think you quite have your facts straight on how they work (although I can only speak for the WA plan). In that plan, while the value of your investment is tied to in-state college tuition rates, when it’s time to pay for college the money is available to you to pay for any school (not just some limited selection of 272 as you indicate). From what I understand, the money can also be used for non-tuition expenses, such room and board.

Here is a link with more information:
http://www.get.wa.gov/overview.shtml

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Neal Frankle December 13, 2012 at 1:17 PM

Garron, I checked out the “GET” plan and you right that it is more flexible. But the facts are a bit hazy. I think what they are saying is that get the value of what the cost of a resident would pay and you can use that in any school in the country. My guess is that this is because the plan is not a pure pre-paid plan and a hybrid pre-paid and 529 plan. Still, I would want to see a list of schools that have agreed to this and/or more information. Also, I would want to see what you have to invest in now and what the value is projected to be. But you are right, this plan offers more flexibility than the other pre-paid plans because it’s not a pure pre-paid plan.

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