 Prepaid
college tuition no longer a big bargain
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 Dear
College Money Guru,
My daughters are 3 and 5, and I would like to begin their college
savings programs now. We live in Maryland, so I would like to get
your thoughts on the Maryland prepaid college plan versus a standard
529. Thanks.
-- Melissa
 Dear
Melissa,
I presume the "standard 529" you're
referring to is the savings-type 529 plan. Every state, with the
exception of Washington, sponsors one or more of the savings-type
529 plans. Typically, your money is invested in a portfolio of mutual
funds according to the plan option you select, and the return on
your investment is determined by the performance of that portfolio
over time.
A state-sponsored prepaid tuition plan is also a 529
plan, just a different type. Your return is determined by the future
value of tuition benefits, not by the plan's investment performance.
Only 18 states currently operate a prepaid tuition plan, and most
of them (including Maryland's) restrict enrollment to families meeting
certain state residency requirements.
529 savings plans offer flexibility and upside investment
potential. But they can also fail to keep up with tuition increases.
Some investment options may even lose value. Prepaid tuition plans
provide peace-of-mind tuition protection. However, the benefits
may vary depending on where your child attends college. Many parents
who bought into prepaid plans years ago are very happy they did
so, as tuition levels have increased dramatically at many state
schools in recent years. But the deal isn't quite the same these
days. Most prepaid programs have been raising their prices faster
than tuition increases, to the point where you may be paying a substantial
"premium" over current tuition levels.
The Maryland
Prepaid College Trust is what I call a "contract"
prepaid plan. You are purchasing the plan's promise to pay your
child's tuition for a specific number of semesters at any of Maryland's
public institutions. The contract for four-year Maryland universities
is priced higher than the contract for two-year Maryland community
colleges. Within either category, you gain the most benefit by having
your child attend one of more expensive Maryland schools. A lower-cost
Maryland public institution means less tuition benefit, although
the Maryland program has provisions to ensure that you receive a
certain minimum level of return. If your child attends a private
college, or public institution outside Maryland, the payment made
by the program is based on average tuition levels at Maryland public
institutions.
A hypothetical and simplified example may help you
understand how prepaid tuition plans work in Maryland and certain
other states:
Full-time tuition at State U. is currently set at
$8,000. Mrs. Jones purchases a one-year tuition package for son,
Mark, at a cost of $10,000. (The $2,000 difference is the premium
described earlier.) Fifteen years later, Mark attends State U. and
the plan pays the first-year tuition bill, which by that time has
grown to $25,500. Although tuition has increased at an annual rate
of approximately 8 percent, the premium paid by Mrs. Jones means
that her actual annual "return" is 6.5 percent. The younger
the child is, the less impact the premium has.
Ohio, Pennsylvania, Tennessee and Washington offer
their residents something a little different -- a "unit"
prepaid or "guaranteed savings" plan. Tuition units purchased
today are redeemed in the future to pay college costs. The value
of a unit is based on a tuition index, typically the average tuition
at public institutions in the state. One advantage of this type
of prepaid plan is that you receive the same benefit, no matter
where your child attends college, and you can use the money to pay
for tuition and for other qualifying costs. These plans also charge
a "premium" over current tuition levels. Ohio's Guaranteed
Savings Fund has been closed to new enrollments since 2003.
You may also wish to consider the Independent
529 Plan, a private-college prepaid tuition plan. Open to residents
of any state, this plan permits you to purchase tuition certificates
redeemable after three years at any of the more than 250 participating
private colleges around the country. The certificates are actually
priced BELOW current tuition levels at those colleges. The pricing
is reset annually on July 1, so there is still time to purchase
tuition certificates at 2005-2006 prices.
To ask a question of the College Money Guru, go
to the "Ask the Experts"
page, and select "college financing" as the topic.
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