4 Questions to Ask Yourself before Agreeing to Prepaid College Tuition

It was only 18 years ago that the average in-state tuition costs were around $5,000. Now it’s over $13,000 and that’s modest in today’s standards. For parents, this huge debt ways heavy on the mind, and many start saving for their children’s tuition before they even reach middle school. And that’s not forgetting saving for all those little extras you didn’t know you would need until your freshman child calls you and asks for another loan.

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There is, however, an answer that many parents believe is their savior. In 12 states in the US and some private colleges, you can prepay tuition years before your child even attends. Though colleges vary with their financial plans, they all agree to let you pay today’s prices which you can use for college credit when your child is actually admitted.

For many risk averse parents, this is an excellent option. Though, you might want to consider these 4 questions about prepaid tuition. It might not be as rosy as you think.

1) Is your child going to attend an in-state college?

Prepaid tuition is only available in 12 states, which include: Florida, Illinois, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Tennessee, Virginia, Texas, and Washington. When you open the account you or the child (sometimes both) have to be residents of the state of the college you want to pay towards.

Another thing to question is if your child is going to want to go to that particular college. Don’t make the assumption for your unborn child that they will want to go to your in-state college, a mistake many parents can make. You don’t want to end up with unused tuition whilst you pay another colleges debts.

2) Are tuition fees on the rise in your state?

Most prepaid tuition plans are the same as a 529 plan, the savings plan that helps you save for college. By putting your money into the state prepaid plan, you will receive tuition vouchers to redeem in one of your state’s colleges. Even though the tuition fees will be higher in the future, you will not be taxed for the value it grows to. This guarantees you college credits even if the market sky rockets in the next few years.

What you have to factor in is whether the tuition savings is going to provide you a better ROI than an investment in sometime more immediate such as stocks or bonds. Though tuition fees have tripled since 1997, people are questioning if this will be the case for the future as legislations are becoming more sensitive to this issue.

3) How secure is your money?

Though it might sound like a fail-safe solution, any amount of money that you put out in advance is at risk. Different states have different policies on the safety and guarantee of your money, and it’s a good idea to understand it clearly. Just as a starter, there are only 3 plans that are 100% supported by the credit of the state; Massachusetts, Mississippi, and Washington.

Other plans are not so solid. For example, Alabama had the plan guaranteed by assets within the fund. When tuition increased, the state could not keep up even with all of their investments and stopped registering people in 2008. Families lost out on thousands of dollars and there was nothing they could do about it.

4) Have you considered room and board?

Sometimes it’s easy to forget that some of the most expensive part of sending your child to college is not the tuition fee. Prepaid plans will not cover things like accommodation, books, transportation or anything else in-between. According to the College Board, accommodation and food expenses can rack up to an extra $10,000 a year.

Though prepaid tuition starts off by sounding like a dream come true, there are many factors to consider before jumping in. It is recommended that you take out other forms of investment such as the 529 plan to help you get through those financially difficult years.