By Chris Taylor
NEW YORK (Reuters) – When inflation is low, locking in prices now for something down the road is not worth considering. But now it might be a big deal.
Just ask Dennis Nolte. The senior vice president of Seacoast Investment Services in Winter Park, Fla., had the foresight to invest a lump sum in Florida’s prepaid college tuition program in 2014 for his daughter Jessica, then 12.
Jessica is now a sophomore majoring in finance at the University of Florida in Gainesville, with all tuition and fees paid.
“It’s really nice to know that regardless of inflation, we’ve got it covered,” Nolte said.
Nolte’s experience sheds light on an interesting corner of the U.S. college savings market: Prepaid programs that let you buy credits or years of education at a set rate.
When the price of everything seems to be rising – annual US inflation was 8.5% in July – the idea of setting future costs at current levels can be appealing.
This is especially true in higher education, where the average annual sticker price for in-state four-year colleges has risen to $10,740. Out-of-state four-year colleges reached $27,560. and private nonprofit colleges are $38,070, according to the College Board.
“Prepaid plans are somewhat inflation-hedged and not subject to market risk,” said Tom Balcom, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Florida. “Customers love prepaid plans when there’s volatility in the stock market because it doesn’t affect them or their savings.”
Prepaid accounts are a small part of the college savings market. As of June 30, about 931,000 such accounts nationwide had total assets of $24 billion, according to ISS Market Intelligence. Compare that to more typical 529 plans, a much larger market of 15 million accounts with $388 billion in assets.
Prepaid tuition is not for everyone. In fact, they are rarer these days, with only certain states offering them. A few things to consider:
BE CLEAR ABOUT IN-STATE REQUIREMENTS
A prepaid plan limits your educational options, which you (or your children) may or may not feel comfortable with. Buying into a Florida program like Nolte, for example, will guarantee tuition at Florida public universities, but won’t cover the full fare if your child eventually wants to leave the state.
In such cases, you usually get the average cost of a public school, but you can apply it elsewhere.
THEY ARE NOT AVAILABLE EVERYWHERE
Only nine states offer prepaid programs that are open to new enrollment, according to student aid specialist Mark Kantrowitz: Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas and Washington.
Some other states like Illinois and Virginia still operate them for existing participants, but are closed to new investments.
The Private College 529 Plan is a unique option that allows you to look out of state, with more than 300 participating institutions nationwide.
KNOW WHAT IS COVERED
While traditional 529 plans cover a wide range of education-related expenses, prepaid plans tend to stick closely to tuition and fees. You may want to supplement a prepaid plan with other savings to help with a wider range of expenses.
“One strategy would be to also contribute to a 529 plan to cover expenses not covered by the prepaid plan,” suggested Paul Curley, associate director for 529 solutions at ISS Market Intelligence. “These include books, computers, room and board if needed, and other specialized higher education expenses.”
Whether or not a prepaid plan is a good deal depends on the individual state – the quality and range of educational institutions and pricing. In Florida’s case, Nolte said, the prepaid plan was a bit expensive, but then the prices went down twice, leading to a partial refund.
Since each plan is unique, some homework is required before deciding whether your state’s offer is worth it.
“Parents and counselors should read the plan disclosures before enrolling,” Curley said. “Many prepaid programs are structured differently in terms of residency requirements, payment amounts, payment frequency, enrollment periods, colleges and universities they cover, whether they cover room and board or just tuition, and more.”
(Editing by Lauren Young and Richard Chang; Follow us @ReutersMoney)