Is your state prepaid tuition plan flawed?

For the cost per credit hour to rise from $102.33 to $213.20 by the time today's eighth-grader reaches college, the assumption is that costs rise at 15 percent annually for the next five years. Even if that proves to be the case, the parent of an eighth-grader will have managed only to buy future tuition at future prices -- but pay for it today. Under Florida law, the aggregate sum of base tuition and the tuition differential may not be increased by more than 15 percent over the preceding fiscal year.

Should prices rise slower than 15 percent annually, then the prepaid plan turns out to be a money-losing investment as the parent will actually be paying more per credit hour than the students who did not purchase a prepaid plan.

This particular package is not the only option provided in the Florida Prepaid College Plan. One can purchase the base four-year state university tuition plan that excludes the tuition differential fee. The cost for an eighth-grader comes out to $119.76 per credit hour, a price that is "only" 35 percent above the current base tuition level. However, base tuition in Florida is more closely regulated by the state and unlikely to come anywhere near a 15 percent annual increase. Some may purchase the tuition plan without the tuition differential -- thinking they are saving money -- but it would mean much higher payouts in the long term.

Using a monthly payment plan or a five-year payment plan for the Florida Prepaid College Plan instead of the lump sum means financing those payments at an "average effective interest rate of 3.88 percent," which involves not only paying the aforementioned hefty premium -- but financing it as well.

What happens if you cancel the plan? Different states have different rules, but the Florida plan permits you to get your money back. But you only get back what you invested, with no interest, and less any administrative fees. In effect, you earn a negative real return as the money returned to you isn't adjusted for inflation or tuition increases in the period of time it was invested.

What follows is a brief recap of the pricing in several other states offering a prepaid tuition plan to its residents. As you can see, most -- but not all -- charge a substantial premium, although none as large as Florida's tuition and fee differential package.

Illinois

• Community College Plan covering Illinois community colleges.
• University Plan covering Illinois public universities, except for University of Illinois at Urbana-Champaign (UIUC).
• University+ Plan covering UIUC.

A multitude of pricing schedules exists. A family that signs up for two semesters of the University+ Plan in January 2010 (lump-sum payment option due March 1, 2010) for a ninth-grader will pay $19,659 or $655.30 per credit hour. The most expensive curriculum at UIUC currently costs $561.60 per credit hour.

Maryland