Are prepaid college plans for you?

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 Tuition 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  know what you are going to spend, you pay now and then you are done with it (for the most part). You don’t have to worry about future tuition fee hikes and you don’t have to worry about investment performance.

According to FinAid.org it costs on average $19,388 per year to attend a state college.  And these costs have been increasing more than 8% a year.  Those are high hurdles to overcome and prepaid plans help you jump them both with room to spare.  I admit that these benefits are attractive. But does that mean prepaid college plans are a good choice? Are such plans the best way to pay for future college costs? No. I say that because there are two huge drawbacks to these plans:

1. Financial Strength

The first concern is financial stability of the plan provider. 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.   If you are still attracted by this option, please look into the financials of the plan provider and make sure they are solid.  Ask them to send you 5 years worth of their financial audits and have your tax professional give them the once over.

Limited Benefits

The plans typically pay for tuition only. They do not cover books or 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:

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.  Then ask yourself if you are willing to take the risk of putting all that money into a pre-paid tuition plan only to find that your child won’t attend a participating college or doesn’t need the money because they are going to receive a scholarship.  Pass the Advil.

It’s true that you can change the beneficiary to another child but who’s to say that that kid will go to a school your plan covers?  Who’s to say your child will even go to college?  There are plenty of promising careers kids can get these days without going to college.

You can probably get your money back if none of your children go to a covered school, but you will likely only get your principal back without any interest.  That stinks.

I believe college is important for many (though not all) students.  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?