My D’s U offers tuition prepayment at current rates for two to eight semesters. It will not affect her merit aid and we are unlikely to need FA (though one never knows). We have enough money in investments to prepay up to all eight. The money is currently in (mostly) index funds. The tuition increase for the past six years has ranged from 3.5 to 4.1%.
From what little financial knowledge I have, it does not seem like a good deal. My understanding is that you can expect 6 or 7% from the stock market. I don’t know if there’s any tax advantage.
Prepaying tuition is NOT like a stock market or index fund investment, it is like a CD or bond. As long as your kid plans to continue at that school and take the 8 semesters it should be good. Last I checked, bonds and CDs are paying WAY below 3.5-4.1%. Of course this could change but it could be a way for you to sleep well at night, as long as you don’t need the money for anything else.
The only tax advantage would come, I think, from not paying taxes at your marginal rate on the money that the prepayment would earn if not spent for tuition. It might be a wash. Plus, you have no guarantees that tuition might not spike in at least one year (although you would think that there has to be an end to the constant increases before college starts costing 100K a year), and you cannot count on any particular return from the stock market. Not trying to be political here, but I have gone much more conservative in my investments since November because I do not know what the future will bring and I have no faith in the current administration. If I were in your shoes, I would think seriously about the prepayment option, BUT be sure to see what the reimbursement policies are if, God forfend, your D were to drop out, be suspended or expelled, want to transfer, have a medical emergency, or any of the other extraordinary events that are grist for the CC mill as we try to put our heads together and help parents & kids through trying situations.
Know that not every student stays 8 semesters at the same school. It is the intention, but sometimes they transfer or drop out of college or run into health issues. If it’s not refudable, be leery.
We prepaid freshman + sophomore then junior + senior. We pulled what was needed out of the market in advance, so these were cash/money market funds. The contract with the school was reasonable. By paying two years at once, we were only hit with one tuition increase. Mentally/emotionally, we liked knowing the tuition portion of the bill was taken care of. Sadly, this is not an option at younger D’s school.
Our school offered pre-paid tuition. However, if my child decided not to attend that school the money was returned with only 2% interest. That in fact was not a good deal for us.
I would have prepaid (it was refundable with no interest) BUT they do not allow it if you have more than $4000 in grants or merit scholarships, which we do. I guess because some of those have gpa or other requirements, but I’m not sure.
As my Scots grandmother was wont to say, TNSTAAFL [there’s no such thing as a free lunch]. Getting all your prepaid tuition back plus 2% even if you just changed your mind sounds like an excellent deal to me. It’s not an indez fund rate, but it beats most [all?] money market funds.
Either prepay or place it in a 529 plan. There is a lot to be said for the relief that comes from knowing you have your child’s education covered no matter what happens.
@snoozn Is the school RIT? My DD is a second year there.
We thought about the prepaid tuition plan there but couldn’t make it work as most of our college savings are/were in a 529 account. The way RIT billed tuition it would have looked like there was only 1 year of qualified higher education expenses while our withdrawal would have been for much more money, there by triggering a taxable event. I went round and round with RIT trying to get them to bill for the full amount but couldn’t make it happen.