What Do You Need To Know About Pre-Paid College Plans?
February 21, 2019When it comes to saving for college for your kids, perhaps you’ve looked in to pre-paid plans offered by your state. Let’s review that decision from all sides.
What exactly is it?
A state pre-paid college savings plan is basically a plan that is sponsored by the state that allows you to open an account and save towards future college expenses now before your kid goes to college, BUT you typically get to lock in the cost of tuition at today’s rates.
The typical perks
1) Lock in today’s rates – The idea is that you essentially may not need to worry about how much college costs go up in the future because you lock in today’s tuition (and certain fees) in your state at participating colleges and universities.
2) Not directly responsible for investment performance– Another benefit is that you usually don’t have to worry about investing your contributions on your own over the years OR choosing a company to manage those funds on your behalf – the state assumes that risk and responsibility.
While the stock market will definitely have its ups and downs, you likely won’t have to worry about adjusting your investments because that’s all done within the prepaid plan.
3) Still covered at other schools – Typically, you can still use the money if your child goes to a school not covered under your state’s prepaid plan, including schools outside of your state’s plan, although you’ll likely have to pay more.
4) Still considered a parental asset – These plans are considered to be owned by a parent and are reported on the FAFSA, but it counts much less when determining how much a family is expected to contribute towards a child’s college costs than if the account was considered the student’s asset.
What’s the catch?
I know, it sounds almost too good to be true. Here’s what you need to know: not all state prepaid plans work the same. Be sure to know what you’re getting into even though the perks sound promising.
QUESTIONS TO ASK so that you know what you’re getting into and can make a sound decision:
1) How is your money protected? Some plans have a guarantee and others don’t. Some plans have failed in the past and people have lost money that they’ve contributed.
2) How long has the plan been around? Has it ever defaulted or had any negative news in the past? A plan that has been around for many years, without issues paying out as students transition to college is more reputable than a plan that hasn’t been around as long or that is not popular in the state and isn’t really being used/invested in. (Example: Illinois)
3) What schools accept your state’s pre-paid plan?A quality education is important, so you’ll want to make sure that an education from the schools on the list will be worthwhile.
4) What if your child chooses a school not on the list? With most plans, you’ll be able to receive the value of what it costs to go to a school in the state you purchased the plan and then put those funds towards the tuition for a school not on the list or even one in another state.
You could be on the hook for additional tuition costs if what the pre-paid plan provides is not enough to cover the out of state school.
5) Are there any penalties if you request a refund? Find out the refund policy and any associated fees. For instance, some plans only refund the exact amount you put into the plan and may even subtract a fee from that. Other plans may allow a percentage of any investment gains to be included in the refund.
6) Are there any restrictions with how soon you can request a refund? Some plans require you to wait two years, or you’ll be charged a penalty reducing how much you’ll receive as a refund.
7) How much does it currently cost to cover tuition and applicable fees in your state? Visit several school websites in your state that have quality education options and find out their costs. You can call the school as well. Compare that to how much it would actually cost you per credit hour based on the monthly cost of the plan. Make sure that you won’t be paying significantly more over time than the promised locked in cost of today’s tuition rates in your state.
8) Exactly what expenses does the prepaid plan cover? Some only cover tuition and certain fees. Find out what those fees are. Contact several of the colleges and universities in your state and find out what fees they charge that the prepaid plan will not cover.
9) What is your plan to save towards expenses not covered by the pre-paid plan? Dormitory expenses are not likely to be automatically included, but some state prepaid plans offer a separate dormitory option that you can add on for an additional cost.
Some people opt for a combination of a state’s prepaid plan to lock in tuition costs, along with other savings options like a traditional 529 savings plan to fund expenses, like books, that may not be included under the state pre-paid plan.
Prepaid plans aren’t for everyone.
For families that are pretty locked in on what school their kids will attend, these can be a great hedge against future costs of education. The trade-off is that you may limit your options and are locking your kids into going to college in order to receive the most value for your money. Whichever side you find yourself on, it’s important to understand the ins and outs of whatever you choose.