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Pre-Paid College Tuition Works Better in a Down Economy

Aug 4, 2012

When saving for college you have choices for where you can invest. Each states 529 college savings plan allows you to either save in an investment account which consists of mutual funds that grow over the years or put money in a pre-paid tuition account.

In the first plan, you invest money in a managed account that invests in mutual funds. The mutual funds consist of stocks that you hope will provide growth over the investment accounts lifetime. The pre-paid account gives you an amount of money that you need to deposit every month until the cash is needed. After making all your payments you have paid for a 2 or 4 year degree, whichever you chose, worth of credits. Your buying the school credits at today's price for an education at a college when the child enters a college program.

The risk of the investment option consists of market volatility and hopefully a steady growth. Many advisers feel over an 18 year time frame you should have a substantial amount of growth in your investment. With pre-paid tuition you don't have to worry about growth or market risk. You are purchasing college credits at today's prices.

If you were one of those smart investors that chose pre-paid tuition you are looking like a genius over the last few years. With the 529 investment plans, many plan owners have seen major losses of principle and growth.

Parents of newborns can expect tuition to be 3.5 times today's rates by the time their children start college, Hebert said. So an investment of $10,000 for a year's tuition will increase to a value of about $35,000 in 18 years - a little more than 7 percent interest a year.

People who put their college savings in the other kind of state savings program: a 529 plan, a tax-free investment plan that comes with no guarantee, are likely feeling less confident after some plans lost 30 percent of their value during the past year.

Both 529 savings plans and prepaid tuition programs have been hurt by the stock market. Price increases like the one in Washington state are the government's way of making up for investment losses, as well as preparing for tuition increases, said Mark Kantrowitz, publisher of FinAid.org.

Personally, I purchase a prepaid tuition plan years ago. My monthly payment is $61.00 every month, this is for a 4 year college degree. Today, the same plan cost parents $300 per month. That's for one child. My account will be worth $15,000 when it concludes. The ones starting today will have to pay in $68,000 for the same plan.

If I used the investment option where would I be today? I should run the numbers someday and see. But a guess 12 years ago, was the right one for me. In a few more years I will have a paid for ticket for 4 years of college.

Got further questions? Catch me on twitter and DM me @529SavingsPlans or e-mail me at 529CollegePlans at Gmail.comWant to be heard? Leave a reader comment below.

2 comments

  1. In theory your argument for pre-paid plans makes sense. However the situation in Alabama and potentially in my home state of Illinois makes me very leery of these plans. Further, the IL plan seems to "penalize" students who might attend our flagship U of IL vs. one of the other state schools based on the way the costs of education are calculated.

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  2. That's interesting because I am finding out many states have these kinds of restrictions that are not well known. That's why I recommend digging down and researching the details of your particular plan. You may not be getting what you think your getting per your comment.

    Washington State has a 529 plan that will fully fund instate schools but out of state schools will receive only partial funding. It's something students and parents need to be aware of when planning.

    My experience with prepaid 529 plans has been a good one. I'm happy with it. I would like to run the numbers for the investment plan and see what could of been.

    Thanks for the comment.

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