YU News
Prepaid Tuition...Oh, Really?
By
Feb 27, 2010, 00:38

Jane J. Kim reports on The Wall Street Journal this week that, "Participants in Early Payment Plans Learn Their College Bills Aren't Always Covered":

...Across the nation, college prepaid plans are operating in the red, putting their promises to investors like Ms. Lambert in jeopardy. For now, the states still are paying tuition as they agreed. But the fine print in some state contracts gives them some wiggle room to pay out less than the promised amounts.

"There's an aura of guarantee around many of these programs," said Tim Ranzetta of Student Lending Analytics. "But when you dig into it, it's often a lot less than you'd expect."

Prepaid plans—a type of 529 plan where qualified educational distributions are tax free—allow families to make an up-front payment in exchange for future tuition contracts or credits. They can prepay either the full tuition bill or a portion of it, in one lump sum or over time.

In general, the tuition guarantee applies to state schools in the state where it is offered, though you can use the money to pay for out-of-state or private schools, though the amount is likely to fall short of the full cost of tuition. If a beneficiary elects not to attend a college covered by the plan, the investor can get his principal back, usually with interest. If he receives more than his contributions, the excess is subject to tax and penalties unless, within 60 days, he rolls it over to another 529 plan.

Investors had flocked to prepaid plans in recent years as they witnessed skyrocketing tuition and huge market losses on their monthly statements for more-popular 529 college savings plans, which often invest in mutual funds.

But market losses also hammered prepaid plans—just less visibly than conventional 529 savings plans...Continue reading The False Security of Prepaying Tuition>>