Are Prepaid College Tuition Plans a Good or Bad Idea?

by Kevin Mulligan

Many states have offered prepaid college tuition plans to parents who are looking to invest in their children’s future. A prepaid tuition program can save parents a ton of money in saving for their children’s education. Unfortunately, many of these plans have recently experienced significant financial difficulty due to the rising costs of college tuition and the downward slump of the economy.

Which is it? Are prepaid college tuition programs a good or bad idea?

Why Prepaid Tuition is a Bad Idea

prepaid college tuition plans

Are prepaid college tuition plans a good investment?

Here are four risks you take with prepaid college tuition programs:

Assuming Your Child Will Go To College

First and foremost, these plans assume that your children will go to college. Because the future is unpredictable, it might be wiser to place your savings into a form that is more flexible and open to various possibilities. You could move out of your state or your children might decide to pursue a different path. This could leave you in financial difficulty down the road and unable to adequately fund what they want to do or where they want to go to school.

Assuming College Costs Grow According to Plan

Many of these plans are structured around the assumption that college costs will rise a certain percentage each year. In many states, the rate at which college costs are growing has now superseded expectations. This has led to severe financial difficulty with these savings plans being underfunded by millions of dollars. In fact some states have run out of funding altogether. The future of severely underfunded programs is unknown amidst a time of budget crunching by state legislations across the country.

Assuming Your Child Wants to Go to, and Can Be Admitted to, a Public Institution

It’s important to note that these plans do not guarantee college admission, and they are generally geared towards public, not private education. So, in many ways, you are limiting your child’s college options. They might have a specific talent that’s better suited to develop at a private school, and if you purchased this plan for them when they were younger, they might be unable to go to their college of choice. Additionally, you might not need the funds at all if they end up with a scholarship that provides for their tuition or they decide not to attend college.

Assuming You’ll Get Your Money Back

Some of these plans will only return your original contribution if your child decides not to attend college, so it’s extremely important to read the small print before you sign anything. It’s this reason in particular that many people have shied away from prepaid tuition plans.

Why Prepaid Tuition is a Good Idea

However, with all of these drawbacks, there are some unique perks to saving with a prepaid college tuition plan.

Purchasing Future College at Current Prices

You are essentially purchasing future college tuition at today’s prices, provided your state’s funding remains intact. (How long underfunded programs is unknown; however, it would be politically unpopular to kill off programs that encourage students to go to school in-state.) Considering college costs are rising at rates well above inflation, being able to lock in your price today could be a huge financial payoff when your child reaches college.

Others Can Contribute to College Funding

In many states, family members and friends can purchase credits towards your child’s tuition. This would be a great way for them to contribute to your children’s future on every birthday or major holiday. Of course, the biggest and most obvious perk is that with just a little bit of investment every month, you will have a significant portion of your child’s tuition taken care of by the time they reach 18. Many of these plans also allow this money to go towards books and living expenses, so they could also get help in those areas as well.

Final Thoughts on Prepaid Tuition Plans

Prepaid college plans were more popular several years ago prior to the major economic slump. However, many people still utilize them today, and there are thousands of students currently in college who benefited from them. It is important is that you assess the pros and cons very carefully for your own unique situation and discuss your options with a financial counselor. This will ensure that you make the best possible choice for you and your family. Before deciding, be sure to consider other options like 529 plans and ESA accounts. Both of these plans offer tax benefits and a way to save and invest for college tuition (funds within these accounts can often be invested in stocks, bonds, and other investments, helping you grow your savings).

Here are some additional additional resources to help you compare these college savings plans, learn more about opening a 529 plan, or learn where to open a Coverdell ESA.

Published or updated March 5, 2013.
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