Should you invest in a prepaid tuition plan? - Institute of Certified Financial Planners offers families tips on deciding whether to invest in a prepaid tuition plan - Brief Article

USA Today (Society for the Advancement of Education), August, 1997

Federal tax law changes have increased the popularity of "qualified state tuition plans" -- popularly called prepaid tuition plans -- for college education. Do these plans make sense for every family planning to send its children off to college? Not always, say many financial planners.

While the plans vary in details, in general, the family pays into the state program a set amount of money based on the age of the child. For a newborn, the family might pay $6,200 for four years; if the child is five, $9,300. Payments either are in a lump sum or installments. The state invests the money and guarantees that four-year tuition costs will be paid for at any state public institution, regardless of how much tuition rates may rise by enrollment time.

Most state prepaid tuition programs allow the transfer of the principal the family pays in, plus earnings (equal to the rise in average tuition costs) should the child decide to go to a private or an out-of-state public school. Some programs permit the funds to be transferred to benefit another child in the same family. The programs also allow refunds, sometimes with or without earnings, in the event he or she doesn't go to college or the parent or child dies before the latter enters school.

Should families take advantage of these prepayment programs? The Institute of Certified Financial Planners, Denver, Colo., suggests keeping the following points in mind when deciding:

Disciplined investors probably can do better on their own. The return on prepayment programs basically is the inflation rate of tuition, which has been running about six-eight percent at public schools. Alternative investments such as stocks, mutual funds, or other more aggressive instruments typically do better than that over time, On the other hand, the tax deferral benefits and the taxing of the earnings at the student's rate close the gap somewhat, particularly for higher-bracket taxpayers. Prepayment programs are especially attractive to people who have a hard time saving money, invest conservatively, or are afraid to invest.

How much time is left before the student starts college is another factor. if only a few years are left, college funds generally should be invested conservatively, such as in bonds or certificates of deposit. The investment return of a prepaid tuition program should do about as well, with the added plus of a guarantee and the tax benefits.

Financial aid, in effect, is reduced dollar-for-dollar by prepaid tuition. That cuts a lower-income family's chance for grants and need-based scholarships.

Doubts about whether your child will go to college reduce the appeal of these programs. Many plans return just contributions, with no interest, if that occurs. If doubts exist, it would be better to invest in other assets whose earnings wouldn't be lost should the child decide not to attend school.

A number of restrictions make these plans less attractive. For instance, the contributor can not direct, overfund, or use the investment in the plan as security for a loan.

These programs don't cover room and board, books, fees, and the many other expenses associated with college. Furthermore, they won't pay for anywhere near all of the tuition costs should the student decide to go to a private school or out-of-state public school where tuition will run much higher than an in-state public school covered by the plan.