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Pros and Cons of Prepaid Tuition Plans

The Motley Fool

By Motley Fool Staff

Prepaid tuition programs are exactly what the name implies: the chance to pay now and buy a certain number of educational credits/years of college at today's tuition rates. Or so the promotional materials like to say.

There are pros and cons to prepaid plans. Let's go through each:

Cons:
  • You could do better investing the money yourself in a college savings plan.
  • Not all states have plans.
  • Depending on your state program, if your child attends a private or out-of-state university, you may fall short -- only getting the sum you invested plus a small rate of interest.
  • Compared to a college savings plan, you have far less control over your contributions.
  • You run the risk of your state becoming unable to back the funds. In some places, prepaid plans have been closed to new investors because of concerns that the plans were underfunded, and many continue to struggle in the uncertain market environment.
  • Prepaid tuition plans cover just tuition and usually mandatory fees, whereas the funds in a college savings plan can be used to cover books, supplies, and room and board.

But as in all stories, the cons are only half the picture. Here's the sunny side of prepaid college tuition plans.

Pros:
  • If the market tanks or tuition skyrockets, locking in a tuition rate will seem like a good plan.
  • If your child attends a state college or university, you will have gotten a good deal on tuition.
  • You don't have to make any investment decisions.

All of that is well and good, but if you've done more than a little bit of research on prepaid tuition plans, you'll know these pro and con lists are everywhere. What's missing from all the other lists is the psychology behind why some might prefer prepaid tuition. Here's what you won't see on any other list. Psychological pros:

  • Perhaps you like the security of knowing your children's college tuition is getting paid for today. You may not be able guarantee they'll have clean underwear for school tomorrow or that everyone's favorite snacks are lined up for the lunch boxes. But being sure they'll have a higher education makes some people just feel better.
  • Some people save more when someone is forcing them to do it. Think of it as a coach for your child's college education! Participating in a prepaid plan involves signing a contract. You can pull out if you need to, but that might feel like you're compromising your kids' futures (or at least your ability to pay for them). Compare that to a college savings plan, which allows you to contribute -- or not -- whenever you want.
  • If you have young children in the house, it's nice to have something basically take care of itself. When all of your contributions to a state-run prepaid tuition program are pooled with others and then invested; it's out of your hands. And yet, when the time comes for your kids to attend college, there the funds will be.

This article has been updated. The Fool has a disclosure policy.