Prepaid College Tuition Plans: Pros and Cons
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What problem is driving interest in prepaid college tuition plans?
Here's your Money Briefing. I'm J.R. Whalen at The Wall Street Journal in New York. The cost of higher education is skyrocketing, and it has driven student loan debt in the U.S. to record levels. Should parents think about prepaying for college installments from day one?
And you're contributing a target amount. Say, maybe it could be the cost of a semester. It could be even a year. It could be four years. And it's a calculation that takes into account today's rate. And then what happens is that money grows. The plant operators will promise that that money will grow to an amount that can be used. It will match college costs down the road.
That's Wall Street Journal contributor Cheryl Winokur-Monk.
How does a prepaid tuition plan work and what do you contribute?
She'll outline just about everything you need to know about prepaid college plans coming up.
Americans hold more than a trillion dollars in student loan debt. And with the cost of higher education likely to keep climbing, parents of young children have an option, prepaying for college tuition, which could ease the financial burden later on. Wall Street Journal contributor Cheryl Winokur-Munk joins us to explain. So Cheryl, how does this work? You actually contribute to a fund?
You contribute to an account, similar like you would for a 529 savings plan. And you're contributing a target amount. Say maybe it could be the cost of a semester. It could be even a year. It could be four years. And it's a calculation that takes into account today's rate. And then what happens is that money grows. The plant operators will promise that that money will grow to an amount that can be used. It will match college costs down the road or they'll make up the difference in most cases.
Okay, so in this account, it does not rise and fall with the markets?
That's correct.
And how is this different from a traditional 529 college savings plan?
A traditional 529 savings plan typically rises and falls with the market, although in some cases, traditional 529 savings plans are offering more guaranteed returns, which is similar to this. But generally speaking, prepaid tuition plans have more constraints. than a traditional 529 savings plan. They just, some of them have, or many of them have in-state residency requirements. So there are limits on who can contribute. Whereas with a traditional 529 savings plan, you can pick a plan even if you're not living in that state.
And it's states that offer these prepaid college plans.
How do prepaid plans guarantee future college costs versus market-linked 529s?
Is that right?
For the most part, states are the ones that offer these. But there is a plan called the Private College 529 plan, which is a plan that's available for nearly 300 private colleges and universities around the country. So there are ones like MIT, Princeton University, Stanford University and many others.
Now, the plan operators, as you mentioned, they promise that the amount of money in your account will grow to match college costs down the road or they'll make up the difference. That seems a little too easy.
Well, in many cases, the states are guaranteeing it. Not always, but in many cases they are. And it is kind of what it says it is. And the problem or the issue would be whether you actually go to college in that state or and if you decide not to go to college in that state, some plans let you do that and some plans don't let you use the money for those purposes.
Now, can you take me through the scenario where a family would make payments to afford college in Florida?
Sure. Just keep in mind, it's going to depend when the child is born. So for this example that I'm going to give, it's a child born on December 10th of this year. And the family is going to have to meet the state's residency requirements. So just those things are given for this scenario. One option might be for the family to make 223 payments of $46.61 a month. which would total $10,394.03 for a one-year Florida university plan. So that could be used for one year at any of the 12 state universities, and that would be for an estimated future benefit beginning in 2038 of $17,000.
What are the residency and enrollment limits of prepaid tuition plans?
So that's a total of $10,394 and change for a total benefit of $17,000.
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Chapters
4 chapters
1
What problem is driving interest in prepaid college tuition plans?
0:05–0:42
2
How does a prepaid tuition plan work and what do you contribute?
0:42–2:29
3
How do prepaid plans guarantee future college costs versus market-linked 529s?
2:29–4:07
4
What are the residency and enrollment limits of prepaid tuition plans?
4:07–5:42
Speakers
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