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.â€
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 Parents defer paying federal income tax on payments until the money is withdrawn; it remains tax-free as long as it’s used for qualified higher education expenses.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)
A prepaid tuition plan is a contract that delivers a promised set of tuition benefits between parents and a state’s prepaid tuition program, allowing them to buy tuition for a child at a set price, either in full or in installments, says Joe Hurley, founder of SavingforCollege.com. Say a
four-year bachelor’s degree at a particular state university adds up to $52,400 for tuition, and room and board. It’s a hefty tab, but compare it with the $180,000 bill you could end up paying in 15 years because of rising college costs. You would be saving $127,600.Every state and Washington, D.C., now offers prepaid tuition or a college savings plan. Also, a group of 270 private colleges offers a national prepaid tuition plan for private and independent institutions, known as the Private College 529 plan, including HBCUs Spelman and Dillard.
However, prepaid tuition plans may not be backed by the full faith of the state. In some states, such as Illinois and Alabama, tuition has increased faster than their plans’ investment returns. Some states are not required to bail out their plans if they fail. Other drawbacks, says Hurley, include attached premiums: You are buying future tuition at a price higher than current tuition, not at current rates. You won’t be subject to any penalties if your child opts not to go to college, but the amount you get refunded may be a lot less than the amount of tuition that would have been paid under the plan, and you may not be able to transfer the funds to one of your other children.
Before opening a prepaid tuition account, consult with a financial planner or a prepaid tuition plan manager. Also, request a copy of the plan’s most recent actuarial report.