|Most parents dream of sending their children to college -- with good reason. On average, a college graduate makes a million dollars more than a high school graduate in lifetime total income. The importance of a college education is clear. Unfortunately, recognizing the importance of a college education doesn't make paying for one any easier. What's more, tuition is projected to more than double in the next 15 years. |
My article in the March 2001 Working Money discussed saving for college using US Series EE savings bonds. If you're looking for further options, here's another way to fight rising tuition: Take advantage of state-sponsored prepaid tuition programs.
WHY PAY NOW?
Prepaid tuition programs allow you to lock in future tuition at current rates. Since these programs are sponsored and guaranteed by participating states, they are considered safe investments. This simple strategy will always meet your needs as long as your child attends an institution covered under the program. The greatest benefit is the guarantee that future tuition for participating state schools will be fully paid even if the tuition for those schools rises.
For example, if you purchase 100% of your child's tuition now, you can be assured that when the time comes for your child to enter college, tuition will be fully covered. You don't have to worry about rate of return, inflation, or market volatility; all you have to do is pay for future tuition in today's dollars. Fortunately, the contribution limits for prepaid tuition plans are generous; most states allow over $100,000. And some state programs offer tax benefits at state and local levels, as well as federal income-tax advantages.
If you value the simplicity -- and cost savings -- of paying for your child's future tuition today, prepaid tuition may be right for you, provided you have considered the downside of prepaid tuition programs as well. Your child's eligibility for financial aid is reduced by every dollar the program covers, and school choice -- private or public, in-state or out-of-state -- is limited. In addition, prepaid tuition only covers tuition and some required fees, such as technology fees. You may still end up paying for room and board and optional expenses, especially if there is a residency requirement.
HOW PREPAID TUITION WORKS
Here's an example of how the tuition-prepaying plan works. First, you must have an idea in which state your child will most likely attend college; it will probably be the state you and/or your child reside in. Suppose you open an account for your seven-year-old to attend the state's best public university in 10 years. The current tuition is $9,000 per year. You decide to pay a lump-sum payment for one year of future tuition at today's price -- $9,000. After 10 years, your child is ready to enroll in the best public university in the state. Your prepaid tuition program will pay the tuition for that one year.
Let's say the tuition is $15,000 per year when your child enters college. Because you paid for that first year 10 years ago, you do not have to worry about the increase in tuition. Essentially, your $9,000 investment 10 years ago has yielded $6,000 in gains ($15,000 - $9,000 = $6,000). You will have to pay capital-gains tax on the $6,000, but the good news is that the capital gain of $6,000 is taxed at your child's rate, which should be lower than yours.
Not only that, some programs will pay toward your child's school of choice up to the state tuition level if he or she chooses to attend one that is not covered under the plan.
SOME THINGS TO KEEP IN MIND
Take a close look at your state's prepaid tuition program to determine what it covers. In addition, note the following:
|PURCHASING PREPAID TUITION |
Investing in a prepaid tuition plan is similar to investing in a mutual fund. Either a state agency or an investment company administers the plan for the state. (Contact your state's Department of Education for more information.) There are two ways to purchase prepaid tuition: through a lump-sum payment or through scheduled payments. Figure 1 shows an example of a payment schedule set up in Washington state. Figure 2 shows how much you would end up paying with different payment scenarios, based on the national average.
Whichever vehicle you choose to fund your child's college expense, keep in mind that time seems to go by faster when you are not prepared. Start early and stick with it. A college education can make the difference between getting ahead and fighting just to stay afloat.
Han Kim can be reached at HKim@Traders.com.
Copyright © 2001 Technical Analysis, Inc. All rights reserved.
|Company:||Technical Analysis, Inc.|
|Address:||4757 California AVE SW|
|Seattle, WA 98116|
|Phone # for sales:||206-938-0570|
Traders' Resource Links
|Charting the Stock Market: The Wyckoff Method -- Books|
|Working-Money.com -- Online Trading Services|
|Traders.com Advantage -- Online Trading Services|
|Technical Analysis of Stocks & Commodities -- Publications and Newsletters|
|Working Money, at Working-Money.com -- Publications and Newsletters|
|Traders.com Advantage -- Publications and Newsletters|
|Professional Traders Starter Kit -- Software|