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Pay it Ahead: Pre-Paid College Plans


Numerous states offer early help for families trying to fund college.

Pre-paying for college sounds like a great idea. But is it really possible?

If you live in a state that currently offers a pre-paid plan (See List of States Offering Pre-Paid College Plans), you may be able to pre-purchase tuition for your child's education. While the programs vary from state to state, some things are common to all of the plans.

The first thing to know, says Betty Lochner, director of the Guaranteed Education Tuition program administered by the Higher Education Coordinating Board of Washington State, is that "unlike a 529 savings plan, where all the risk goes to the investor, with a pre-paid plan, the risk goes to the state."

And, more recent programs are now putting the risk with the universities themselves.

Basically, these programs, which are also 529 plans, operate in one of two ways. Some plans offer the opportunity to buy "units" that might equal a percentage of a year of tuition, or a portion of a school credit. Contract plans have you pay for anywhere from one to five years of tuition.

The misconception about many of these plans, however, is that you're purchasing future tuition at today's prices.

"That was the old days," says Joe Hurley, who founded the Web site and is the author of The Best Way to Save for College -- A Complete Guide to 529 Plans.
"With today's plans, you're buying future tuition at future prices," he says. "States build in premiums based on the fact that the cost of tuition will continue to rise. So, what you have to do is evaluate whether tuition is going to continue to rise, and how quickly it will rise. If it rises at a double-digit pace, you'll recover your premium quickly. If it goes up moderately, it might not be such a good deal."

Of course, a lot depends on when you decide to enroll in a program. Like any investment, your money has a better chance to grow the longer it's in the program. So, for instance, if you enroll in a program the day your child is born, you have 18 years for that money to work. Of course, if your child is a freshman in high school, you'll need to do a few more calculations to determine whether enrolling in a plan is the right thing to do.

One thing you can count on is tuition increases. According to the College Board, the average tuition increase at public colleges was 6.4% for 2008-09. And, in a year that was bad for personal accounts and endowment funds, some colleges actually implemented mid-year increases.
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