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Do Prepaid Tuition Plans Make Sense?
Published: 03/28/2011 by Kristie Lorette
» Money
Parents, grandparents and college-bound kids watched in 2009 and 2010 as their stock portfolios, A.K.A., college savings plans, lost up to 55% of its value. While this does not mean that saving for college is an activity you shouldn’t participate in, it does mean that you should look at alternatives, such as prepaid tuition plans. As is the case with any financial account and decision, you should evaluate all of your options for paying for college, rate the pros and cons of each and then decide which options fit into your personal financial situation.
Saving Today for Tomorrow
Prepaid tuition plans allow you to save money from the time your child is born until they head off to college. While many of these programs try to make you believe that you are locking in the tuition costs of today for 18 or so years from now, this is not the case. Prepaid tuition plans allow you to start saving money for college, but the plan estimates how much you need to save to cover the costs of tuition when it is time for your child to head off to college.
Making Contributions
Prepaid tuition plans typically have two payment options. You can either make lump-sum contributions to the account or make monthly payments. The flexibility allows you to choose the contribution option that fits your finances. In addition, the payments can be setup on automatic debit from your checking or savings account so that the habit of saving for college is on autopilot.
Advantages and Disadvantages
The primary advantage of a prepaid plan is that it means you have some of kind of savings account together to pay for your child’s education in the future. Using a prepaid tuition plan also relieves you from having to establish an investment account and make investment decisions on what you should invest the money. Since the account does not rely on the movement of the stock market, a prepaid tuition plan also makes sense because if the market tanks your prepaid tuition plan is unaffected.
On the other hand, when the stock market is performing, you can grow an investment account to higher levels than you can with a prepaid tuition plan. Another problem is that not all states offer a prepaid tuition plan. Even in cases where your state does have a plan, if your child chooses to attend a private university or an out-of-state educational institution, you may not have enough money in the prepaid tuition plan to cover the costs. Prepaid tuition plans also relieve you of control of what your money is invested in, so you are relying on a fund manager to make you money on your money. Finally, prepaid tuition plans only cover the cost of tuition, where other types of college savings plans cover the costs of books, supplies and room and board, in addition to tuition.
In the end, prepaid tuition plans have advantages and disadvantages. But, so do other types of college savings plans. Establishing and maintaining a prepaid tuition plan is beneficial because it allows you to start saving and helps to cover the future costs of your child’s college education. You should consider all of your options and choose the types of savings plans that fit your personal financial situation and your expectations for the future.
