Should You Prepay College Tuition?

Weighing the pros and cons of paying tomorrow’s college costs today


(Image: Thinkstock)

As parents of three young children, managing future college costs is top of mind for Anjuan, 37, and Aneika Simmons, 38, of Houston. The Simmonses began researching options for financing the college education of their sons Koveil, 7, and Kyric, 5, and 4-year-old daughter, Vicia, shortly after each child was born. For their sons (they’re still deciding about their daughter), the couple is using prepaid tuition plans.

Anjuan, an IT consultant, and Aneika, a college professor, plan to make installment payments over a 10-year period into the Texas Tuition Promise Fund, one of the state’s three prepaid tuition plans. The couple expects to deposit for both sons a combined total of about $13,000 annually, which will cover undergraduate resident college tuition and required fees at a public college or university in Texas. As of 2010, public colleges and universities in Texas cost an average of $5,836 a year; private schools cost $22,218, or $23,344 and $88,872, respectively, for four years. By the time the oldest Simmons child is 18, average college costs could exceed $200,000 for four years at a public school and $390,000 at a private school.

The couple is aware of the possibility that over the years, college costs may not grow as much as the average annual rate of 6%. “That would result in us purchasing future tuition and fees at the same cost we would pay in the future or, worse, at a higher cost—if college education costs fall instead of grow,” says Anjuan. But, “this is a low risk for us, since tuition in Texas rose 39% between 2003 and 2006.”

Prepaid tuition plans benefit parents who don’t want to worry about how fast tuition rises in the future. And there are tax benefits. Parents defer paying federal income tax on payments until the money is withdrawn; it remains tax-free as long as it’s used for qualified higher education expenses.

(Continued on next page)

Pages: 1 2

Leave a Reply

Your email address will not be published. Required fields are marked *