How To Put A Lock On College Costs - prepaid tuition plans - Brief Article

Kiplinger's Personal Finance Magazine,  Sept, 2001  by Catherine Siskos

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EDUCATION | Fees are on the rise at state universities, and so is interest by parents in PREPAID-TUITION PLANS.

IN RECENT years prepaid college-tuition plans have been eclipsed as savings vehicles by increasingly popular Section 529 investment plans (see "Miracle Grow," on page 104). But with the stock market falling and college costs rising faster than the rate of inflation, parents are flocking to prepaid plans as a safe haven. Participation this year in the Virginia Prepaid Education Plan is up 20% over last year. Texas and Florida are also reporting renewed interest.

Prepaid plans, which are available in 18 states, allow parents of children who are three or more years away from attending college to lock in today's tuition for the future, by either paying a lump sum or setting up a monthly payment program. Money in the plans grows in lockstep with annual tuition increases and can be used at any public college or university in the state.

Last year, when Standard & Poor's 500-stock index lost 9%, prepaid plans recorded moderate gains, as tuition rose by an average of 5 % at four-year public schools and 7% at two-year community colleges, according to the College Board.

Tuition hikes could be even steeper this year because many states are anticipating budget cuts. Typically, "when state budgets are really pressed, state tuition goes up more rapidly," says Sandy Baum, an education economist and professor at Skidmore College. Among the states offering prepaid plans, Alabama, Michigan, Mississippi, Ohio and Tennessee are all facing revenue shortfalls in the coming years that could lead to tuition hikes if education spending is cut.

College-cost inflation, however, isn't likely to approach the soaring levels of the late 1980s and early 1990s. Some states with prepaid plans, such as Colorado, cap tuition increases. In a slowing economy, tuition hikes can't be too far out of line with increases in family income, says Baum.

COPYRIGHT 2001 The Kiplinger Washington Editors, Inc.
COPYRIGHT 2001 Gale Group