This week I wrote about the prepaid tuition plans offered by Washington state and Virginia. To close out the week I wanted to share a brief roundup of the other prepaid tuition programs still out there.
First, take a look at the overview, then I’ll offer some brief commentary:
|State||Plan||Premium (discount) to current tuition||In-state public benefit||In-state private benefit||Out-of-state benefit|
|Washington||Guaranteed Education Tuition||8.80%||Tuition and mandatory fees at most expensive Washington public college or university||Tuition and mandatory fees at most expensive Washington public college or university||Tuition and mandatory fees at most expensive Washington public college or university|
|Virginia||Prepaid529||0%||Tuition and mandatory fees||Payments made plus the actual rate of return||Payments made plus a reasonable rate of return|
|Florida||Prepaid||6.5%||Tuition, tuition differential fee and other specified fees||Average rate payable to in-state public institution||Average rate payable to in-state public institution|
|Mississippi||MPACT||6.5%||Public in-state standard undergraduate tuition rates and mandatory fees||Weighted-average tuition and mandatory fees at Mississippi public colleges and universities||Weighted-average tuition and mandatory fees at Mississippi public colleges and universities|
|Maryland||Prepaid College Trust||(20.4%)||In-state or in-county tuition and mandatory fees||Tuition and mandatory fees up to the Weighted Average Tuition||Tuition and mandatory fees up to the Weighted Average Tuition|
|Massachusetts||U.Plan Prepaid Tuition Program||0%||Lock in a percentage of current tuition and fees at participating public and private schools in Massachusetts||Return of investment plus CPI||Return of investment plus CPI|
|Nevada||Prepaid Tuition Program||(6.1%)||Tuition at rate selected on contract||Paid at rate selected on contract||Paid at rate selected on contract|
For each plan, I calculated the cost based on the most comprehensive plan available (usually a four-year university plan) for someone born this year (most of the plans get more expensive the closer your beneficiary is to graduation). I then calculated the premium or discount paid compared to the amount paid for someone using their benefits this year at the most expensive in-state institution.
The prepaid tuition plans follow three basic models.
Fixed payout rate
This is the model used by Washington and Nevada. You buy a certain number of investment units at a fixed price today, and then are paid out at a different, hopefully higher value in the future. In Washington the payout rate is based on the most expensive public university in the state, while in Nevada it’s based on the “credit hour cost” set by the Nevada Board of Regents.
Washington charges a premium of 8.8%, meaning tuition and fees at the University of Washington would need to rise that much before a contract would start to show a profit.
Nevada, on the other hand, charges less per credit hour than the current payout rate: you can buy 120 university credit hours for $24,285, or $202.38 per credit, while the current payout rate is $215.50 per credit hour.
Both programs allow you to receive the same benefit at in-state public, private and out-of-state schools, making them by far the most flexible prepaid tuition programs.
Tuition and fees
Virginia, Florida, Mississippi, and Maryland allow you to use your prepaid tuition plan to cover in-state tuition and fees at public schools. Mississippi and Florida have the additional cool benefit of guaranteeing beneficiaries in-state tuition, even if they’re not residents of the state when they enroll.
The premium I show above is the difference between the cost of a prepaid tuition contract and the current value at the most expensive public institution. If your beneficiary attends a less expensive school, the premium goes up, since contracts cost the same whether you attend the University of Virginia or the College of William & Mary (the latter is more expensive).
The discount shown for Maryland’s plan is an artifact of my methodology, due to the outlier expense of attending St. Mary’s College of Maryland, where tuition and fees for four years cost $57,984 and a four-year university plan costs just $46,135. At the University of Maryland Baltimore County, the second-priciest public university in the state, four years costs just $46,072, leaving the Prepaid College Trust with a small premium.
One final thing to point out here: the weighted averages used by Florida, Mississippi, and Maryland to calculate the benefits payable to beneficiaries attending private and out-of-state schools will be much lower than the maximum benefits I used to calculate the premium and discount rates. In Maryland, the weighted average tuition for four-year colleges is $10,033, giving the Prepaid College Trust a premium of 14.8% (the amount the weighted average tuition would have to rise before your contract broke even).
The Massachusetts model is fascinating. Instead of only applying to in-state tuition at public universities, the U.Plan Prepaid Tuition Program has a long list of participating Massachusetts public and private schools.
Accounts owners make a dollar-denominated contribution to their account and then that contribution is converted into a percentage of tuition and fees at the prevailing rates at every participating school.
So, to use this year’s table, a $1,500 contribution today buys 2.86% of tuition and fees at the (expensive) Amherst College and 29.94% at the (cheap) Berkshire Community College. Next year, if Amhert’s tuition rises by more than Berkshire’s, the same $1,500 contribution might buy 2.5% at Amherst and 29.5% at Berkshire.
The two contributions together, then, buy a total of 5.36% at Amherst or 59.44% at Berkshire — whichever one you end up enrolling in.
This plan has one big advantage: it lets you lock in today’s tuition prices, and at a wider range of schools than just the public institutions available in the other plans, including premier institutions like Amherst, Wellesley, Smith, and Mount Holyoke.
But that advantage comes paired with a big downside: if you attend a non-participating institution, you get nothing. Well, not exactly nothing; you get your money back, but without any investment returns at all.
That creates an obvious bind: the earlier you contribute, the lower the tuition rate you’re able to lock in, so if you anticipate that Baumol’s cost disease will continue to ravage the higher education sector, you should accelerate contributions early on. On the other hand, the earlier you contribute, the more years of investment returns you sacrifice if your beneficiary ends up attending a non-participating school!
Now you know everything I know about prepaid tuition plans. A few closing thoughts:
- A sufficiently wealthy resident of Washington or Nevada, with sufficiently young kids, should consider buying the maximum contract if they want to place a bet on the trajectory of public higher education costs. Both programs are fully funded (Washington at 135% and Nevada at 132% of liabilities), so I don’t see any reason to worry about the programs being unable to pay the promised benefits.
- Residents of Florida, Mississippi, or Maryland with young enough children might consider combining a prepaid tuition plan with a 529 college savings plan. If their children attend private or out-of-state schools, then the weighted average tuition paid by the prepaid tuition plan should have steady, bond-like returns, allowing them to take more investment risk in their college savings plan. If the beneficiaries do end up attending an in-state public institution, then they’ll receive a bonus payoff in the form of discounted tuition. Note that the beneficiary should be young enough to give rising tuition plenty of time to overcome the premium paid.
- Residents of Massachusetts or Virginia with enough children may consider opening a prepaid tuition plan in order to lock in today’s tuition rates, since the ability to change the account’s beneficiary from one child to the next increases your odds of being able to claim the benefit, by attending a participating school in Massachusetts or a public university in Virginia.