Prepaid

Pay for your children’s education today

Using today’s dollars to buy tomorrow’s university education (for your children) is an enticing option. But is it a wise move?

That depends on how fast you believe annual tuition costs will rise from today until they go to school. In recent years, tuition fees have risen 7 percent or more annually with relatively benign inflation. What would happen if government funding for post-secondary institutions decreased or inflation increased? Most likely tuition fees would rise faster than that 7 percent, with investment returns unable to keep up.

The merit of a prepaid-tuition guarantee is definitely a question to consider when pondering how to pay for your children’s education. It’s not a sure thing that your college savings plan will be able to do better given stocks have produced 7 percent annual returns for the last 100 years. What are the odds that you are going to do better? Not very good; thus it becomes a race between the rising costs of post-secondary education and the ebb and flow of the stock markets. It’s pretty hard to pick a winner.

Like most financial decisions, this one is really a personal preference. The information online and in print tends to favor the college savings plan over the prepaid tuition plan.

Some reasons for this include:

• Prepaid plans are usually limited to a set of schools within a certain state.
• In most cases you can’t be a non-resident.
• You’re out of luck if your child decides to go to a school other than one on the qualifying list. You do however receive the value of the tuition in today’s dollars when you withdraw the funds to pay for college. For example, if your son gets accepted into Yale, but you paid for a year at Florida State, then Florida State pays you in cash their tuition fee for the current year. You then need to apply that to the Yale tuition. Given Yale’s fees, you’re going to have to come up with some additional funds.

Saving for your children’s education isn’t easy. The decision about which plan to utilize is difficult and putting aside funds in the budget each year probably even more so. In the end you need to remind yourself that anything you can do is better than nothing at all. When the time comes, you’ll figure out all the pieces of the puzzle to make it happen for your son or daughter.