AVAILABLE PLANS
There are 21 prepaid plans offered in 19 states. But 10 states have closed plans to new participants.
Among the 11 open plans, only Massachusetts, Mississippi and Washington guarantee theirs with the “full faith and credit of the state,” according to the College Savings Plans Network. That means they will borrow if necessary to make up the difference if the plans run short of money.
Alaska, Florida, Maryland and Virginia also back their plans with differing guarantees. Open plans in Michigan, Nevada, Illinois, Pennsylvania and Texas are backed only by the funds’ assets.
Just two prepaid plans are open to residents of any state: Massachusetts’ U.Plan program and the Private College 529 Plan, sponsored by the Tuition Plan Consortium representing more than 270 private colleges and universities nationwide.
PROS
Advocates of prepaid tuition plans call them “peace of mind programs” and say they still offer that comfort.
“They’re still very appealing in this environment with unknown amounts of tuition increases as well as investment volatility ahead of you,” says Joan Marshall, executive director of College Savings Plans of Maryland. “A couple of states clearly have had problems, but it’s unfair to lump them all in together.”
Prepaid plans as a whole are 93 percent funded, up from 91 percent a year ago and that’s more than adequate to assure future payouts, according to the College Savings Plans Network.
As to any fears of not getting your money back, Marshall says no one who has used a prepaid plan has received a lower amount than was paid in.
Kathy and Joe Halliday of Bel Air, Md., paid off their daughter’s tuition through Maryland’s prepaid plan by the time she was in middle school. That meant they didn’t agonize when the stock market crumbled. The plan covered Leah’s two years in community college and now will take care of her tuition at Johns Hopkins University.
“It was a great relief,” Kathy says. “It was the best financial investment we ever made.”
Mat Forrest and his wife Jillian of West Palm Beach, Fla., recently purchased a Florida prepaid college plan for their daughter Addison, who turns 2 in August. He acknowledges that the interest rate is small and they might well do better investing the money in a stock plan. But he likes the simplicity of being locked into a fixed monthly payment of $287.71 and knowing that should take care of Addison’s college tuition.
“Any time you can lock in the cost 18 years before you need to pay it, that’s probably a good thing,” he says. “And I don’t need to stress out over the markets.”
CONS
Some experts who once recommended the plans for new investors no longer do. They cite the increased risk that states won’t make good on their original commitments and the chance that parents will have to pay more to make up for shortfalls in state funds.
“Peace of mind may be a fiction,” says Kantrowitz. “If you’re investing now for the first time, the money may disappear by the time your child is ready for college.”
While losing your money is unlikely, there’s a real chance of seeing your investment stay flat or even decline in value if the state makes changes that dilute the plan.
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