<p>I hope this question doesn't sound obnoxious. I know we are very lucky in that we're able to afford this, and that we can even consider this as an option.</p>
<p>The school my son is going to this Fall offers a "Tuition Pre-Payment Plan." They permit us to pay the 2007-2008 tuition times four and be done with tuition -- we won't experience an increase during the four years he attends.</p>
<p>Of course, fees and room and board are separate.</p>
<p>I called the school to ask what the percentage increase has been over the last several years and was told it has increased between 4 1/2% and 5% each year.</p>
<p>We do have the cash available. (Obviously, or this wouldn't be a consideration!) </p>
<p>I guess the main question is whether we can EARN more by holding on to the cash and just paying the tuition out every year. </p>
<p>the other set of questions I would have would be things like ... what happens if my son decides he wants to transfer (can I get a refund?)? ... what happens if my son flunks out? What happens if my son becomes too ill to continue?</p>
<p>If you are paying the full frieght, then I would. From what I have seen, the yearly increases seem to be heftier than any interst I have been able to make on my money. And this seems to be your major question. But I am wondering - How would this affect your tax situation? Hope and Lifetime credits? Need to get taxguy on here. Are the payments amortized over 4 years? Do you take the write-off in one year and lose the second? Sounds like a visit to tax man would help you here, as well.</p>
<p>On $200,000 you can get a better interest rate than 5 percent, even if you invest very conservatively. </p>
<p>My answer would be different if the school also gave, for example, a 10 percent discount if you pay up front. Can you ask them about that? It will save them billing and administrative costs and they will have the money in hand. Heck, even my kids' orthodontist gives a 10 percent discount for full payment up front.</p>
<p>My opinion it would be foolish to pre pay. You can offset the increase in a number of investment instruments. Right now interest rates are up and T Bills/CD's and guaranteed funds in 529 plan's are paying high rates. Investigate or 529 plan or talk to a CFA for options. Keep your money and make the interest off it yourself as opposed to giving it to the school and letting them make it.</p>
<p>Here is your answer: a 529 Plan in Connecticut (whether the school is in CT or not). Last May, the CT state legislature passed a state income tax deduction for contributions to the state's 529 plan, up to $10,000 per year for a married couple. You can contribute more, and any excess over the $10K per year can be carried over for 5 years.</p>
<p>Since CT's state income tax is around 5% on the marginal income, YOU MAKE AN INSTANT 5% on the money the moment you put it in the plan (at least on that first $10K, and carrying it over for the next 5 years, it will pay off as well in those years). Plus, depending on the investment strategy, you'll get additional interest.</p>
<p>I'm leaning toward NOT doing it, as it would then pretty much wipe out my cash reserves and I'd have zero dollars in non-retirement plans. </p>
<p>I also think I should be able to get a return of 5%, plus 2% for the tax I'd be paying on the taxable earnings. I have a call in to my investment advisor to see what this chunk of $$ has been earning through the years. It's invested pretty conservatively right now, given my need for it in the short-term. </p>
<p>I will also be discussing this with the Tax Man (once April 17 is done -- I don't think he wants to deal with stuff like this right now).</p>
<p>But I like the suggestion that I ask about a discount if I pay it all up front. I think they think that the "advantage" to me is that I don't have to suffer the tuition increases over the years, so I'm not expecting anything else. but, it never hurts to ask.</p>
<p>Our financial advisor told us to do it if we could (Grandpa left $ for college). At the private U, with costs increasing 4 1/2 to 6 % per year, we locked in and paid the full amount. They deduct the small NMS $ from room and board and other fees. It was really, really nice to ignore the burser's bill come spring semester! On the other hand, we were not wiping out all of our reserves. I don't know if we would have been willing to do that.</p>
<p>4.5-5% is a pretty high tax-free rate of return. You would not do better than that on any kind of conservative (= not equities, investment grade debt) investment strategy.</p>
<p>On the other hand, the possibility of losing the return through a refund event clearly reduces the expected return by injecting some risk into the investment analysis. And I wouldn't bet all my cash reserves on this, either. </p>
<p>Digmedia's suggestion of a CT 529 plan is probably a good alternative, given that there's $6,000 of tax subsidy to be harvested as well, and you can do better than 4-5% tax-free in a 529 plan. Also, you don't have to put in the whole amount, and you can ultimately get it back (with some penalty) if it's not spent on education for some reason.</p>
<p>Anybody who can afford to prepay four years of tuition is probably not getting tuition credits or deduction. Although it would be a good idea to check first. And at that income level, assuming the questions are answered about what happens if the child doesn't complete the four years, I'd say that is a very good after tax rate of return.</p>
<p>I agree with Wis. You shouldn't wipe out your cash reserves. There's no telling what you could need some of that money for. If you had to use any of the money, at least some of it could be replenished with current earnings.</p>
<p>Like Blucroo, Grandpa left me this $$$, and it's been earmarked for college ever since he passed away. </p>
<p>Prefect, that's what we've been doing. Every once in a while we need to buy, say, a car, and we use the $$ in this account, but then we'll put it back over the next year or two. </p>
<p>There's also always the reality that I might lose my job. (It's happened before; it could happen again.) Having that cash would be important.</p>
<p>Well, I will be talking with the investment man and the tax man over the next few weeks.</p>
<p>BTW, they told me that if he doesn't complete his education for any reason, we get the unused tuition back. I didn't think to ask, and she didn't offer, whether there's any sort of interest credit.</p>