Pre-Paid College Plan Risks: What To Ask

Given the search for value in an education, and the decline of investments over the past 18 months, state universities are looking like a better deal than ever for parents and students who don’t want to graduate tens of thousands of dollars in debt. And, if you happen to live in  a state where pre-paid college plans are offered, this savings strategy seems appealing.

“I think it’s the relative safety of the program, and given what’s happened in the market, people are looking for greater security for their money,” says Kathleen McGrath, director of the Tuition Account Program bureau for the state of Pennsylvania. “It’s not risk-free, but it is a low-risk environment, and, especially for people whose children are close to college age, they need to be in a low-risk environment.”

More than 91,000 Pennsylvania residents are enrolled in the state’s plan, and McGrath said the past year has seen a dramatic increase in the number of people who have joined. The state of Washington has also noticed a large increase -- 24% in the 2008-09 program year.

Some things to consider: 
 

• How old is your child when you start saving? The closer your child is to college age, the less of a wise choice it can be. The earlier you start, the better. In general, by the time your child is in high school, starting a pre-paid program may not offer much return on your investment.
  
  
• What fees does the plan charge? “Some of these plans are very expensive. If there’s going to be a fee for managing the program, make sure you know exactly how much,” says Gary Carpenter, a certified public accountant based in Syracuse, New York, and an executive director of the National College Advocacy Group.
  
  
• Does your state limit the use of the money to in-state public colleges? Can you use the money for private colleges? What about using the money for vocational schools? Every state has a different policy, and you should make sure you understand that policy before you commit.
  
  
• What is the refund policy? While it’s hard to know if your 2-year-old will want to attend college, it seems prudent to begin saving for the possibility. But, if that money goes unused, what can you expect? Can you transfer it to other family members?
  
  
• Are there limits to the amount of money you can save? Is there a minimum amount you must invest?
  

Carpenter says it makes sense that more people are looking at these plans when they think about how to save for their children’s college education.

“Ten or 12 years ago, when the stock market was going crazy, people put their money into the market, and thought, ‘If I can invest a little money now, down the line we’ll have enough for college.’ Then we had the Internet bubble burst in 2000, and the current downturn, and now, the stock market isn’t looking like the best place to save for college. With a pre-paid plan, the money is guaranteed to grow.”