college

Is your state prepaid tuition plan flawed?

Stack of books, green apple, graduation hat and an equation written on the board
Highlights
  • In Florida, the plan could actually be a money-losing investment.
  • The idea, 'Paying future tuition at today's prices,' is often untrue.
  • Canceling a plan can mean a negative real return on your investment.

While stock portfolios and home values suffered major losses and "safe" investments turned out to be anything but over the past 18 months, many parents and grandparents are wondering if there's a better hedge against ever-escalating college costs than prepaid tuition programs.

After all, as the recession knocked 55 percent off the stock market's value and a nearly equal percentage was lopped off home values in some parts of the country, college tuition continued to chug ever higher and seems bound to join death and taxes as virtual certainties.

At first glance, prepaid tuition plans may appear to be that perfect hedge: They can look like a method to buy "tomorrow's tuition at today's prices," thereby eliminating an investor from relying on appreciation in the value of other asset classes.

The Florida Prepaid College Plan nicely illustrates the point and may prove helpful not only to Floridians, but also to residents in other states that are considering prepaid tuition programs.

Let's begin by dispelling the biggest misconception about the Florida Prepaid College Plan, and perhaps those of some other states as well. Prepaid tuition plans are often thought of, or even marketed as, "buying future tuition at today's prices." With regard to the Florida Prepaid College Plan, that is not the case at all. In fact, you're buying future tuition -- but at very inflated prices.

First, keep in mind that the cost of the plan depends on the age and grade of the child when you purchase the plan. Secondly, the plan can be paid for in a lump sum, upfront payment or on a five-year or monthly payment plan in which the payment never increases.

Let's say you wanted to purchase the plan for your child who is enrolled in kindergarten this year -- and who would be entering college in 2022. Under the lump sum plan, the single-payment for 120 credit hours would be $15,202.65. But the plan also provides for a "Tuition Differential Plan" fee -- an added charge which is described as allowing Florida state universities to "raise revenue to improve the quality of undergraduate instruction and to increase the availability of financial aid."

The tuition differential fee for this same child this year would be $17,745.31.

Therefore, the total lump sum or single-payment cost to purchase this prepaid plan for a kindergarten student would be $32,947.96 -- or $274.56 per credit hour. The price goes down the older your child is because fewer years will elapse until your child enters school and, presumably, the tuition and differential costs will not rise as much:

2nd grade -- $269.10

6th grade -- $246.46

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8th grade -- $213.20

Needless to say, if the current cost per credit hour at Florida state universities is $102.33, it doesn't take an MBA to recognize you're not paying anything close to today's prices on that future tuition.

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