Monday, January 11, 2010
Pre-paid tuition may not be best deal
Editor's note: On Mondays, we answer a financial question from a reader. If you have a financial question you'd like addressed in this space, e-mail email@example.com, or post it in the comments below. You can also DM us on Twitter @family_finances.
QUESTION: I think that the pre-paid tuition plans that many states offer are probably a good deal – pay college tuition now, at today’s rates, for your child’s future education. But I hesitate to do this. My children are very young, 5 and 3, respectively, and I wonder if the plans will still be in tact when they’re ready for college, or if there are any other possible pitfalls to consider. What do you think, in general, of these plans? Or is there another way to save for college
ANSWER from Dan Danford: I think anything you can do to prepare your family for the expenses of college is a good thing. My only hesitation about "pre-paid tuition" is that the plans are usually tied to a specific institution. Sometimes, they are tied to institutions in a specific state. That worries me because it reduces flexibility, and if you follow anything I write, you know flexibility is key to financial success.
I have three daughters. All three graduated from college, and two of the three have already finished grad school. My youngest is in grad school today. As I sit and think about this, we've paid tuition and fees to Columbia College, Missouri Western State University, Texas Christian University, Emporia State University, Chicago Portfolio School, University of Missouri (Columbia), Southwest Baptist University, and the University of Missouri (Kansas City). That's three (very successful) daughters over nine years, and my simple point is this: it's hard to predict what your child will want or need a decade or more in advance. Any investment plan that ties benefits to a particular school or state could be a problem later.
My suggestion is to use a 529 plan for education-specific savings. These plans don't impose limits on where your child or grandchild might attend. Virtually any accredited college, university, or trade school will qualify. Also, for maximum flexibility, I recommend a family investment account (in parents' joint name) to augment the 529 plan. That way, there's a cushion for expenses that might not be direct education costs. Help with a car, for instance, or travel to and from school.
Higher education is extremely important today and will simply get in importance over coming years. It's important to plan ahead and set aside money to help your children or grandchildren. Keep in mind, though, that the longer the time horizon, the more need for financial flexibility. Keep as many options open as possible.