Are prepaid college plans worth the cost?

By Rebecca Holcomb
Wealth of Geeks

The average college cost of tuition, fees, room and board for the 2020-2021 school year was between $25,000 (state school) and $51,000 (private or out of state tuition) per year.

That’s up 170% since 1980. And some experts are predicting by the time newly born children graduate in 2030, it could cost a staggering $500,000 for a bachelors degree.

Many states offer pre-paid college plans — but the numbers are dropping and programs are increasingly more limited.

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Blink and you’ll miss them

Dean Lyman, a certified financial advisor with Wealth Tender, explains: “only nine states support prepaid college plans, and almost always the benefit is only maximized for in-state institutions.”

Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, and Washington. These state-specific plans often prefer state public schools over private and out-of-state institutions, along with this short list.

College is More Than Just Tuition

It’s easy to get caught in the tuition cost cycle, worrying about how expensive it is to attend college. But often, parents neglect to think about all the extra expenses of sending their children off to college.

State pre-paid plans may cover some of these, but the 529 prepaid plan covers most, if not all, of them. You’d have to decide which savings option is better for your family based on your financial situation.

• Room and Board — This benefits students who stay on-campus in a dormitory, instead of living off-campus or with their parents.

• Books — It might seem trivial to think about saving money for books, but when a new version is needed, as often happens with college texts, those book prices can easily cost $100 apiece or more.

• Food — Eating on-campus is not cheap. Whether your child’s college has just a cafeteria or a concession stand, food costs are high and can take a large part of your savings.

• Transportation — If your student plans on taking a car with them to college, there are parking fees to consider. Maintenance is also an issue to prepare for. If their car breaks down, how will they get it repaired? Does your insurance cover the work they’ll need to have done?

• Laundry — This cost isn’t high, but it can feel like one more bill to add to the pile if money is a concern. Not all colleges cover laundry facilities for their incoming and current students, and it’s certainly an expense to consider.

Electronics — Most colleges have a computer lab on campus, but ensuring your student has the necessary electronics for those late-night study sessions and end of the semester term papers is essential to helping them succeed. The 529 plan option covers computers, printers, tablets, and anything else your child might need to use every day.

Typically, the state prepaid plans lock in todays tuition rates. 529 plans do not have this provision, but as illustrated, are more flexible in the costs they cover. So if your child’s preferred college or university is on the plan’s covered schools, these programs can go a long way in saving you a bundle in fifteen to eighteen years.

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Pitfalls of prepaid plans

• College lists — State-run options work on a list of preapproved schools. If you choose one of the schools they prefer, they’ll meet the cost of tuition based on the percentage of the plan for that specific school. If you choose an out-of-state school or one that isn’t covered by their specific plan, you’re likely to get back only your contribution.

• State plan tuition — The state plans have tighter restrictions limiting how, when, and where you spend your contributions. For instance, if your child goes to an in-state private school on their preapproved list, you’ll likely only get what you paid into it back as coverage. The state plans also don’t cover much in the way of extra costs, as mentioned above.

• Transfers — When deciding on a college, parents usually have one they’d prefer their child to attend. Sometimes the child agrees, and sometimes they balk at the idea. So, what happens when a child wants to transfer schools? If your child chooses to transfer to an out-of-state or non-approved school, you’re only going to get what you paid in with the state arrangement for the remainder of the child’s college education (i.e., if your child transfers after two years, you’ll get the remaining two years’ worth of college contributions, but no growth that may have accumulated over that).

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Yea or nay

Prepaid college plans can certainly benefit parents who feel they might not be able to afford college tuition out of pocket when their children are ready to attend. However, there are significant factors to consider if you think your child might be picky about which school they attend. Talk often and honestly about what you can afford and can’t as they’re growing up.
Helping them understand where you’re coming from and what they may need to contribute should be an ongoing conversation as their college years approach.