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:
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.