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Getting on a pre-pay plan for college

Sarah Gardner Jan 19, 2009

Getting on a pre-pay plan for college

Sarah Gardner Jan 19, 2009


Sarah Gardner: One of the many things on Barack Obama’s to-do list is the cost of college tuition. Tuition’s still climbing and the stock market’s still falling, so more people are liking the idea of locking in future college costs. It’s called a pre-paid 529 plan. It’s different from the 529 you’re probably more familiar with. This is one of those “safer is better” stories. Here’s Sarah Gardner.

Sarah Gardner: Shaun Flanders’ daughter Makena isn’t even a year old yet, but he’s already paid half her college tuition.

Shaun Flanders: Just over $15,000 for two years.

This past fall, Flanders enrolled in Washington state’s pre-paid 529 plan. That essentially means he’ll pay tomorrow’s in-state college tuition at today’s prices.

Flanders: Eighteen years from now, I’d have to think $15,000 probably wouldn’t get you a whole lot.

Thirteen states offer pre-paid 529’s that guarantee tuition prices. That’s in addition to the more popular 529 savings plans that don’t have guarantees, but have the potential for gains tied to the market.

Now that market’s so rocky, pre-paid 529’s have drawn more investors. Take Pennsylvania’s plan, for one:

Robin Weissmann: Well May through September, the percent change went up over 43 percent.

That’s new enrollments in 2008 compared to a year earlier, says state treasurer Robin Weissmann. Weissmann estimates families in her state can save over half to three-quarters of college tuition if they start making payments when a child’s in diapers.

But Joe Hurley, founder of SavingForCollege.com, says pre-paid plans have limitations:

Joe Hurley: One of the biggest factors is where your child goes to college.

Pre-paid plans are typically pegged to the average public tuition in that state. So if a child insists on a more expensive school, families are stuck making up the difference. Still, the directors of pre-paid 529’s are seeing some skittish parents pulling money out of their now-shrunken 529 savings plans and investing them in pre-paid’s instead.

Andrew Davis heads the Illinois Student Assistance Commission:

Andrew Davis: That’s a trend that is just beginning and we do expect folks who’ve had a . . . been given a pretty sound drubbing by the stock market to say: “No mas, we’re going into a pre-paid tuition plan.”

But Davis expects the recession will curb the number of families able to pre-pay in big chunks like Flanders.

I’m Sarah Gardner for Marketplace.

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