Savvy Consumer: Texas unveils new prepaid tuition plan

Texans have a renewed chance to offset the increased costs of college tuition and fees under a new prepaid tuition plan announced Wednesday by state Comptroller Susan Combs.

Flexibility and pricing without a premium built in are two of the attractive features in this plan, according to Combs and investment advisers.

"This is an extremely flexible plan [that] allows families to lock in undergraduate tuition and required fees at the current rates for Texas public colleges, and then prepay those expenses before the child is ready for college," Combs said.

Under the Texas Tuition Promise Fund, parents, grandparents and others can fund one of three levels: tuition and fees for community college, the average weighted tuition of all four-year colleges in the state or the highest-cost colleges in the state, depending on where they want the child to attend.

Money in the plan could also be used for out-of-state or private schools, with students and their families making up the difference in cost. Prepaid tuition accounts must be open for at least three years and be paid up before they can be used, Combs said.

Consumers have three ways to buy into the plan, which is sold in units equal to 1 percent, with 100 units equal to one year or 30 credit hours. You can pay for it in a lump sum or on a monthly or annual installment plan, or on a "pay as you go" investment as new versions of the plan are rolled out.

"Once the account is open, you can make contributions any time you want for as low as $15," Combs said.

The current enrollment period is from Wednesday through Feb. 28, and the enrollment fee is $25.

But beware: The interest rate cost for those who pay in monthly installments is 8 percent, a cost that is factored into the payment over the life of the plan.

Set prices for the plan run from $16.99 per unit for community college to $98.50 per unit for the most expense four-year colleges.

What will it cost you?

Combs provided several examples of how the plan works from a calculator parents can access at the new plan’s Web site, www.EveryChanceEveryTexan.org.

For example, a fund for a newborn to go to community college would cost $15.16 a month and would be fully funded by the time the child graduates from high school. The cost for the average four-year state college would cost $60.36 a month.

For a 7-year-old child, the community college fund would cost $20.48 a month until high school graduation to be fully funded. The monthly cost would rise to $81.53 a month for the four-year school plan for a 7-year-old.

Is it a good deal?

Steve Blankenship, a certified financial planner with Heritage Financial Planning in Grapevine, said he supports the new plan.

"Overall I think it’s fantastic," he said. "It’s a good first step for a lot of people with younger children. It won’t help me with my 15-year-old, however."

The Promise fund is based on the weighted averages of current tuition costs at public colleges and universities statewide, without a premium built in, as is the case in some other state prepaid plans, said Joseph Hurley, a nationally recognized guru of college savings plans and founder of SavingforCollege.com.

"If they’re able to price this at par, that’s a real benefit for families," he said. "All four years of the weighted average tuition comes down to this number."

How does it stack up?

Twelve other states offer prepaid tuition plans, Hurley said. Those plans hold assets between $20 billion and $30 billion — well under the $108 billion in the more popular 529 college savings plans.

"This is the first new plan in quite a while," Hurley said.

Several states, including Texas, closed their prepaid tuition plans in the past few years as tuition costs increased well past the plans’ investment returns, Hurley said.

The state’s last prepaid tuition plan, the Texas Guaranteed Tuition Plan, stopped accepting enrollment after tuition deregulation in 2003, when the Prepaid Higher Education Tuition Board recognized that the state would have difficulty guaranteeing payment. There are 119,000 active contracts under that plan, said R.J. DeSilva, spokesman for the comptroller.

The new plan, created by House Bill 3900 in the last legislative session, has several safeguards to protect the state from further liability under a prepaid plan. Individual schools, not the state, are now liable for any difference in tuition between the prepaid plan amount plus investment growth and the increase in tuition. The state also requires an annual independent audit of the fund.

Barbara Shields, a certified financial planner with Diesslin and Associations, said she will "wait and see" before recommending the prepaid plan.

"Our biggest concern is whether the state is separating the assets of the previous and current prepaid funds," she said. Also, she said she is wary that the new plan does not have the full faith and credit of the state behind it, as the first plan did.

Overall, however, planners are generally in favor of such prepaid plans.

"There are two primary risks that parents face with college costs: tuition inflation risk and investment risk," Shields said. "The prepaid tuition plan helps with its feature of locking in today’s tuition and its guaranteed investment return. You know it’s going to be a positive return."

What are the downsides?

The plans are not for everyone, Blankenship said.

The plan is only for undergraduate college tuition and fees.

The plan doesn’t cover special course fees for science, arts and other classes, which are on the rise.

You must be a state resident to buy into the plan; moving out of state will complicate your position.

The state has a vested interest in encouraging parents to find a way financially to get their kids in school, Combs said.

"We think it is critically important for a vibrant economy and a strong work force that we have educational opportunities for all Texans," she said.