The Resurgence Of Prepaid Tuition Plans For Estate Planning

Those long-neglected, unsexy prepaid college tuition plans are making a comeback as an Estate Planning strategy. In recent years they took a back seat to the stock market and Section 529 college savings plans. My state of Virginia announced, however, that over the last year applications to its older prepaid tuition plan soared while contributions to the college savings plan stagnated. I suspect that is happening all over the country, and there are good reasons people are taking a fresh look at the prepaid plans as a componennt of their estate planning.

Both the prepaid plans and college savings plans are under Section 529 of the tax code, though the widely-promoted savings plans generally claim Section 529 as their own.

The major advantage of prepaid tuition plans is certainty. You tell the plan the age of the child to be covered, and the plan tells you how much to contribute each year. The plan then guarantees that all tuition and mandatory fees will be covered for four years of college.

A potential disadvantage is that the guarantee covers only the cost at public colleges within the state. Private colleges and those in other states aren’t guaranteed. If the child does decide to go to an institution that isn’t covered, the plan will determine a cash amount that can be applied to the costs at those institutions.

The prepaid programs are more attractive now for two reasons.

One reason is the stock market. A few years ago it was easy to forecast that mutual fund investments in regular accounts or the college savings plans could accumulate more money than the prepaid plans. The bear market in stocks is making the moderate guarantee of prepaid plans a more attractive estate planning strategy to a number of people.

Another reason to look at prepaid plans is that college costs are about to skyrocket. For decades the cost of higher education rose faster than general inflation, usually at a 6% to 7% annual rate. The cost of college is likely to increase more sharply in the coming years. State budgets are in the red and legislatures are reducing higher education spending. Also, the economy and bear market have reduced contributions to the institutions and the returns from their endowments. Buying into a prepaid plan now will lock in today’s prices and save a lot of money if college costs increase rapidly as expected in the next few years.

A prepaid plan won’t cover all the costs of college. Additional costs include room and board, textbooks, a computer, and expenses other than tuition and fees. You cannot withdraw the money the way you can do with a college savings plan or a regular investment account. There also might be limits on changing the beneficiary.

Though a prepaid plan won’t cover everything, its certainty and guarantee are looking attractive to more people.