Prepaid college tuition plans are no longer the surefire solution to runaway tuition costs they once seemed.
The mostly state-sponsored plans were designed as a way to save for college by locking in at least a portion of future tuition at today’s prices.
The premise remains sound: Pay now to minimize the shock of rising costs. After all, tuition has increased an average 7 percent annually since 1990 and shows no sign of slowing down.
But the battered finances of state governments have raised questions about whether some plans will live up to their promises.
Numerous states have shut down their plans or changed them as their deficits widened. Facing shortfalls, some have bumped up the prices by charging substantial premiums above the cost of current tuition. And several of the 11 open plans do not offer guarantees.
“It’s a model that doesn’t always work,” says Joseph Hurley, a CPA and the founder of Savingforcollege.com.
College financing experts advise parents and students to carefully review the specifics of their state’s plan and determine if it makes sense for them.
A closer look at some important points to consider about prepaid plans:
A prepaid tuition plan allows families to buy future tuition units or credits at current prices. If you purchase shares worth one semester’s tuition when your child is young, the shares should always be worth one semester’s tuition regardless of how much rates increase. The credits can sometimes also be applied to room and board.
Most prepaid plans have residency requirements. Purchased credits can be applied toward a college in another state, but there’s no assurance the full cost will be covered. If a student decides to attend a private or out-of-state college, the plans typically pay the average of in-state public college tuition, according to Mark Kantrowitz, founder of the financial aid site FinAid.org.
States invest families’ money in the stock market and use their investment returns to pay for the tuition.
But some programs have run into trouble after investments lost money in the market downturn in 2008-09 and tuition rose faster than expected.
Alabama had to make compromises in its program this spring in order to keep it operating, and now pays less than full tuition. Prepaid plans in Kentucky, Illinois and South Carolina are less than 80 percent funded for future payouts, raising the risk of future changes.