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I'm a father of two boys, ages 6 and 8. I've read about this pre-paid tuition plan called "Tuition Plan, Inc." I was thinking of investing in it now, since they guarantee I'll pay today's prices for college ten years from now. Is this true? What's the downside?

By David Hawsey on Friday, August 10, 2001 - 10:00 am: Edit

Tom: This is a complicated issue, but here are the basics about Tuition Plan, Inc. I'll research more on this later, and provide an update as I get more specifics from the company.

Tuition Plan Inc. is the brainchild of one man who used to be the vice president for finance and operations at Sewanee (University of the South). He took an economist's approach to this issue, rather than a consumer's approach. The premise is that if you buy "shares" of tuition today, you'll pay no more than today's prices for a college education years from now. Of course, the earlier you purchase these shares, the better the deal seems. Several hundred colleges have paid $10,000 each to participate in this plan. Why would colleges "pay" to be part of this plan? Read on. As Groucho Marx once said: "There's less there than meets the eye." For consumers, that is.

The last time I checked, shares could be purchased in increments, and payments could be made in many ways, including monthly installments. Shares are then "cashed in" at the time of the first tuition bill, and you are covered. I'll have to go back and check on the minimum share purchase. There are many hidden issues with this plan. Here are just a few.

First, you must apply and be accepted to the colleges who participate in this plan. Plain and simple.

Second, when I checked two years ago the IRS was making a final ruling on this plan, as it involves taking your money, and investing it in a pool (TIAA-CREF was selected as the funds manager; this is a good thing for colleges, since TIAA-CREF is one of the leading funds management companies today, posting returns between 12 - 28% depending upon the allocation among all investment vehicles.) Colleges like this plan because they get a great return on their investments, and if a school is in financial difficulty in any particular year, they can at least depend upon a full-fare tuition-paying student coming their way for the next four years. They need not "discount" the tuition in order to get you to matriculate. If institutional sources are "unfunded" (meaning no endowment dollars support the reduction in list price), they are essentially giving away a portion of the tuition revenue.

Why should you care? Because the plan comes with the stipulation that you are not taxed on your investment when you cash in your "shares", but you are limited in the amount of interest you see if you decide to withdraw from the program. Last time I looked, it was capped at around 3%. So, if you decide you want your money back, your interest is substantially less that what the colleges are receiving in aggregate.

I will research this fully and put a special report on the website. The bottom line, however, is that consumers should think twice about this program. In the words of the man who crafted this tuition plan, "This is primarily for the benefit of the colleges. Our return is great, and it provides a cushion against financial ups and downs over the years, and against inflationary pressures that challenge our internal budgets. Families do lock in tuition, but in reality, they could get the same or even a better return in the private markets."

Wow! You heard it right from the source: This is a program that benefits the colleges more than you. If you manage your money well, you might be able to save enough to cover the entire cost of college through investment vehicles available to everyone. Ironically, TIAA-CREF went public and is now available to private investors. Even with taxes on your investments at the time of withdrawl for tuition payments, you can do just as well as colleges do within the plan itself. And why would you settle for a 3% return on your investment anyway (should you decide to ask for your shares back prior to using them for college costs)? The big issue, however, is this: If you have invested with Tuition Plan, Inc. your son or daughter might not be eligible for ANY academic scholarships that they might have received had you applied for aid like any other family. This would have reduced your net costs, possibly lower than your entire investment in Tuition Plan, Inc. should your sons achieve high academic marks when applying to colleges.

We'll gather more information regarding the "fine print" on Tuition Plan, Inc. and provide a full report later in the year. For now, be careful. Some state plans are a better deal.

By RM on Monday, August 13, 2001 - 07:32 pm: Edit

My boy's are 4 and 6 years old now. How will enrolling in a state savings plan now effect our chance of getting financial aid when they are of
college age?--Is it wise to save as much as possible now or be thrifty and depend on financial aid later? Thank you.

By Roger (Roger) on Sunday, August 19, 2001 - 10:49 pm: Edit

Hi, RM. Maybe DH will jump back in with some cogent advice, but in the meantime, I'd suggest looking at a couple of things:

First, check to see how the state savings plan handles various options - e.g., student decides to attend an out of state school, student is awarded major scholarships at the state school and won't need all the money, student doesn't attend college at all, etc.

The state plans are often decent if the student ends up attending one of the covered schools, but vary widely in provisions for returning the money if not. Some may return only the principal, some may return some minimal interest, etc. It's really important to read all of the fine print and understand what happens under all possible outcomes. Even though it may seem very likely that your student will attend one of the covered schools, when the time actually comes that may not be the best choice. What if he gets into Harvard? What if he gets a full ride to an out of state school for athletics? What if he wants to major in marine biology and that isn't offered in-state?

The other area to consider is the impact of saving in the child's name (I assume these accounts are so designated). These savings will reduce possible financial aid awards much more than equivalent savings in the parents' names.

For a general discussion about whether it is better to save or spend, as well as the challenges and uncertainties of college financial planning, check out Ants vs. Grasshoppers.

By Roger (Roger) on Friday, August 31, 2001 - 11:00 am: Edit

I did see a note on one program recently that indicated that the account was considered a parental asset. No other details right now - maybe somebody with direct program knowledge can jump in...