<p>Under what circumstances would it make sense to take a college's offer of prepaying 4 years tuition at the 2005-06 rate?</p>
<p>D was accepted ED to Wash U and this was one of the options given in the info for parents. We've saved enough so that we COULD do this, but why would anyone want to, since you lose income on your savings for all those years?</p>
<p>Has anyone ever does this?</p>
<p>I didn't do this, but if you had the cash on hand you would essentially be making a bet about your return on investing/saving that cash vs. the increasing costs of tuition.</p>
<p>If you assume tuition to increase 5-6% per year, and if you can do better in a "safe" investment on your own (after taxes on interest and earnings), then you would be better off paying as you go rather than up front.</p>
<p>The obvious corollary to the second half of mackinaw's post is that if tuition increases significantly more than you expect (University of Richmond increased 30% this year! and WashU has every right to do the same), or if something changes in you financial situation and 3 years from now you simply do not have the cash on hand to pay the bills that come every few months from WashU, prepaying might have been the better choice.</p>
<p>I prepay tuition at the beginning of each school year rather than deal with the tuition schedule, or the monthly payment plans. The kids' school gives a 5% discount. But I wouldn't do it for more than a year ahead of time cuz too much can happen in that period. You do need to look at the consequences of a kid dropping out, taking off a year, transferring.</p>
<p>People do this as a way to put the money away if they are in uncertain situations---say, divorce, ill health, etc. I know an grandmom who prepaid her grandchild's tuition that way at Duquesne University, rather than change her will to reflect that desire. One did go there, but the other chose not to. This offer is sometimes given by schools even before the offspring is accepted or of age to go, and some 529 state plans have this option. Also if the family is involved in some risky business or possible law suits, by prepaying that tuition, regardless of what happend the college is taken care of.</p>
<p>4 years does seem like a bit much to prepay. The benefit is saving tuition increases. But what happens if student transfers, flunks out, changes status to part time, or god forbid - gets sick or dies? Do you trust the school to honor the agreement in year four if the school has a "financial crisis" ? What if the student earns a scholarship in years 2, 3 or 4? Would you get a partial refund? I think all things considered I would prefer to hang on to my money and deal with tuition hikes as they occur.</p>
<p>The Richmond increase was for new students only. Returning students saw a 5% increase.</p>
<p>Pre paying tuition is a gamble. You are betting that tuition will increase at a higher rate then you would get for you money elsewhere.</p>
<p>Before prepaying you must take into account .. do you get a refund if you decide to transfer. What is your child goes abroad for a semester and the program is through a different school.
You need to make sure you get everything back with no penalty for dropping out of the school.
Also you usually are then not eligible for any type of scholarship money. So if you become eligible say in your junior year for a scholarship, if you've pre paid you cant get it.</p>
<p>Tuition rates at many schools are greater than the 5% you earn on your money, so if you have the monye it might be a good option.</p>
<p>Janesmith, we are looking into pre-paying our daughter's tuition at Dartmouth - thanks for posting this. We are trying to get answers to all the questions people have posted. We also are getting tuition numbers for the last 4-5 years off the website to try to estimate what the tuition increase will be. Because it is Dart, I'm not too worried about them going broke ;), but a big tuition increase could happen anywhere, I guess. The scholarship eligibility is a new one for me.
The 10 month plan that many schools have is actually a pretty good deal. Correct me if I'm wrong, but I think you pay about $50 fee per year, then pay 10 installments of tuition without interest. If you don't have to have a loan, that seems pretty cheap.
I am basically self-employed (closely held corporation), and I don't take a large enough salary to pay on the monthly plan without seriously inhibiting cash flow (as in we start bouncing checks until the next dividend). I get over half my compensation as a quarterly dividend, so I have to figure out some way to pay lump sums once or twice a year holding on to the money as long as possible, and incurring the lowest interest charges possible. to complicate things, we have an open home equity line that we could use, so we have to figure the time value of tying up the money vs tax credit vs avoiding tuition increases.</p>
<p>Prepaying tuition is a big gamble, as other posters have said. In retrospect, though, if we had locked in the initial tuition, we would have saved $14k.</p>
<p>It has never been an issue with our kids, though it would be with this upcoming freshman. Don't think I'll take the risk, however. Who knows if he would decide to take a couple of years off. You do have to read the terms of the contract very carefully if you are going to sink that kind of money into prepaid tution. What does happen if the kid drops out, takes a year off, transfers, gets a special scholarship award (unlikely at schools that do not have merit scholarships), graduates early? The problem is in my life, anyways, things happen that are just not covered. I have lost money on every kind of warrenty and insurance. We always fall between the lines in some way, and have either lost the money (vacation insurance, flight insurance, warrenties) or had to sue to get something. Not something I want to enter with tuitions being that kind of money. I think though, if I were in a state like VA, with all the kids I have, I would have funded at least one of the prepaid 529 plans. The amounts are not as large, and with the choice of instate schools, I don't think we would lose. But I wouldn't have bet a dime on my kids journies through college.</p>
<p>One reason not to prepay four years is that it might put pressure on a student to remain in a college that they find after a semester or two is not right for them. The idea that the parents had prepaid is one more pressure not to change direction when it might be in a student's best interest. I can't think of anything else where we prepay and commit to the entire term- maybe timeshares - but those are exchangable. Most people carry a mortgage on their house, and even if they paid cash, can sell anytime they want. The bottom line for me is - if I had that much money (it's all hypothetical for me) I wouldn't do it because I feel I would be telling my kid that they couldn't change their mind. It's worth paying a 6 percent annual increase to maintain flexibility in personal finances and in a kid's college career.</p>
<p>I would not even prepay my house. No certainty on how fast I could get my money out of it if I needed it. Depends on the financial and housing market. Having moved so many times, I know how much trouble it can be to sell a house and to get a mortgage. I would not want to be a these agencies' mercy if I wanted to get my money out in a hurry.</p>
<p>Thanks for all the replies. Lots of good reasons NOT to prepay. D definitely wants to do a term or year abroad, but presumably there's some fine print that addresses that, or if a student drops out. (D may get a National Merit scholarship but that would be only $2500 a year.) I guess housing/meal plan is not part of the deal? I definitely need to read the fine print.</p>
<p>There must be some real benefit (to the parents) or why would they offer it? It would be interesting to talk to someone who did this.</p>
<p>There were indeed a lot of good points brought up in this discussion. But just for clarification, if you assume tuition increases 5% per year (which seems very likely) and a marginal tax rate of 40%, you would have to earn 8.33% (5%/.6) on your money to breakeven on the prepayment plan. Since you probably are going to hold the tuition money in some fixed income instrument (not equities), the 8.33% return implicit in a tuition prepayment program may be an attractive option for some.</p>
<p>Our son just announced that he's added up his credits and can graduate a semester early. Our next door neighbors kid moved back home in January after doing the same. Our son hasn't made a decision yet as to what he's going to do, but the savings from one semester more than outweighs what we'd have saved if we'd prepaid (wasn't an option for us since the school doesn't offer it, and we didn't have the money). Neighbors kid is working fulltime while living at home and waiting to hear from grad school.... so they're reaping the benefits of no tuition plus he's earning a pretty respectable salary.</p>
<p>Net-- proceed with caution.</p>
<p>Since all schools probably have different rules for this pre payment option... YOu need to check this out. Which school are you talking about.</p>
<p>Blossom, I can only dream that that would happen at my house :).</p>
<p>Cangel, believe me, we were shocked. However, if your kid hasn't actually sat down with an advisor from his/her academic department, I'd encourage you to suggest it. Next door neighbor's kid didn't realize that by taking one extra course fall semester of sr. year he'd be eligible to graduate in December (actually the graduation will be in June.... he's just done with classes and doesn't have to pay for his eight semester). Parents have another in college and two more to go, so they are telling everyone in town to make sure their kid is on top of graduation requirements. His commencement will be Xmas in June for all of them!</p>
<p>Cangel, I know what you mean. We thought we were going to get away without D's tuition next year. But we did get a nice break on a totally unexpected merit award for her this year. Many of these plans have escape clauses, that could make them attractive. If you end up about even or close if the kid does not do the four years as specified, it may well be worth that risk when the upside is that you are $15K ahead of the game. Our track record has just been so lousy with these things. We pulled S from a major school trip to Europe where we paid trip insurance, and mental/emotial issues were specifically excluded which would have been our loophole. Am still fighting Orbitz, the airline and the trip insurance over a switch in audition plans that resulted in cancelling our tickets. Vaguer language on that one, but a problem none the less. I can feel in my bones that if I laid out $120K or so, something would happen that is not covered in the contract and subject to interpretation and a lawsuit to get the money back.</p>
<p>Our daughter is a freshman at Wash. U and we have chosen the prepayment route. Room and board are included, and the university will refund any money due to "downsizing" the plans chosen (my daughter switched meal plans at the beginning of the semester, and we had no problem with this). As others have suggested, we are gambling that any money lost from not being invested will be offset by tuition increases during our daughter's four years in college; this seems like a pretty safe bet to us. When we received notice of the tuition increase for next year (about 4.7%), we actually smiled. For us, a bonus of the prepayment plan is the peace of mind it provides in allowing us to know what the ceiling on our total payment is.</p>
<p>Good to know. Wash U already is one of the most expensive schools out there, you wonder how much more they can raise tuition in the next four years!</p>
<p>Another question: Will the light rail extension to campus be finished by September?</p>