A prepaid tuition plan is a contract that delivers a promised set of tuition benefits between parents and a state’s prepaid tuition program, allowing them to buy tuition for a child at a set price, either in full or in installments, says Joe Hurley, founder of SavingforCollege.com. Say a four-year bachelor’s degree at a particular state university adds up to $52,400 for tuition, and room and board. It’s a hefty tab, but compare it with the $180,000 bill you could end up paying in 15 years because of rising college costs. You would be saving $127,600.
Every state and Washington, D.C., now offers prepaid tuition or a college savings plan. Also, a group of 270 private colleges offers a national prepaid tuition plan for private and independent institutions, known as the Private College 529 plan, including HBCUs Spelman and Dillard.
However, prepaid tuition plans may not be backed by the full faith of the state. In some states, such as Illinois and Alabama, tuition has increased faster than their plans’ investment returns. Some states are not required to bail out their plans if they fail. Other drawbacks, says Hurley, include attached premiums: You are buying future tuition at a price higher than current tuition, not at current rates. You won’t be subject to any penalties if your child opts not to go to college, but the amount you get refunded may be a lot less than the amount of tuition that would have been paid under the plan, and you may not be able to transfer the funds to one of your other children.
Before opening a prepaid tuition account, consult with a financial planner or a prepaid tuition plan manager. Also, request a copy of the plan’s most recent actuarial report.