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College Savings – Prepaid Tuition

October 25, 2011

Based on 10-year historical averages, university tuition has increased at about 6% annually. (Last year, it was 7.9% for public universities and 4.5% for private.)  This being the case, throwing a few dollars into a savings account won’t get you very far. There are a number of savings options for college, and we’ll run ’em down over the next few days.  Today, let’s take a look at prepaid tuition

Basics

There are only a few states that still offer a guaranteed prepaid tuition program.  Florida is one of those states, so I figured it would be worth addressing.  Prepaid tuition is exactly what you’d expect:  you pay tuition at today’s rates for guaranteed tuition credits in the future.  For example, if you pay for 15 credit hours for your 10-year old this year, that’s 15 hours he or she will have in 8 years when they begin college.

Benefits

  • Paying today’s rates given rapidly increasing tuition costs
  • Can be transferred to another qualifying family member
  • Can be transferred to out-of-state or private institution

Burdens

  • Can only be used for tuition and fees. (Florida offers a separate plan for room and board).  You cannot use any of the funds for other college related expenses, such as books and supplies.
  • Though you can transfer credits to an out-of-state university or private school, it will be at a reduced rate.
  • If for some reason your child or children are not able to attend college, you can receive a refund, but it will be with modest interest.

Recommendation

As you’ll see in the coming days, there are better options.  The limited flexibility of pre-paid plans, and a rate of return of 6% (based on annual tuition increases) make it a less desirable option.  I WOULD recommend a prepaid plan if you’re within 5 years of your child starting college and you’re 99.9% sure they will attend a Florida (or state-sponsored) school.

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