Prepaid College Tuition Plans: Pros and Cons

Summary

WSJ Your Money Briefing – Episode Summary

Episode Title: Prepaid College Tuition Plans: Pros and Cons
Date: December 27, 2019
Host: J.R. Whalen
Guest: Cheryl Winokur Monk, Wall Street Journal Contributor
Podcast: WSJ Your Money Briefing

---

Episode Overview

This episode breaks down prepaid college tuition plans, exploring how they work, their differences from traditional 529 savings plans, their advantages and drawbacks, and practical examples of costs and benefits. Wall Street Journal contributor Cheryl Winokur Monk explains the nuances, provides real-world scenarios, and shares tips to help parents decide if these plans fit their college savings goals.

---

Key Discussion Points & Insights

1. What Are Prepaid College Tuition Plans?

(Starts at 00:36)

• Prepaid plans allow parents to lock in today’s tuition rates by paying over time or in a lump sum, aiming to match future college costs.
• The money grows in the account, and the plan operator generally commits to filling any gap between what was paid and actual tuition costs.

Quote:
“It’s a calculation that takes into account today’s rate. And then what happens is that money grows. The plan operators will promise that that money will grow to an amount that can be used. It will match college costs down the road.”
— Cheryl Winokur Monk (00:49)

---

2. Comparison: Prepaid Plans vs. Traditional 529 Savings Plans

(01:44–02:57)

• Prepaid Tuition Plans:

  • Offer a guarantee (in many cases) to match future tuition costs, regardless of market performance.
  • Typically have more constraints, notably in-state residency requirements.
  • May or may not be portable (usable out of state or at private schools, depending on plan).

• 529 Savings Plans:

  • Invested in financial markets, values can fluctuate.
  • Increasingly, some offer guaranteed returns, blurring the lines somewhat.
  • Usually have fewer restrictions regarding state residency and where funds may be used.

Quote:
“Prepaid tuition plans have more constraints than a traditional 529 savings plan. Many of them have in-state residency requirements ... whereas with a traditional 529 savings plan, you can pick a plan even if you’re not living in that state.”
— Cheryl Winokur Monk (02:24)

---

3. State and Private Prepaid Plan Providers

(03:01–03:20)

• Most prepaid plans are state-run.
• There is also a Private College 529 Plan covering nearly 300 private colleges nationwide (including MIT, Princeton, Stanford).
• Flexibility varies by state and by plan; always check specifics.

---

4. Guarantees and Limitations

(03:20–03:53)

• In many cases, states guarantee tuition matching—but not always.
• Limitations include residency requirements and potentially restricted use if the student attends out-of-state or non-participating schools.
• Some plans permit use of credits out-of-state; others do not.

Quote:
“The problem or the issue would be whether you actually go to college in that state ... some plans let you do that and some plans don’t let you use the money for those purposes.”
— Cheryl Winokur Monk (03:30)

---

5. Real-World Example: Prepaying for College in Florida

(03:56–04:59)

• Example:
  • Family with newborn on Dec. 10 and meeting residency rules.
  • Option 1: 223 monthly payments of $46.61 (total $10,394.03) covers one year at any of Florida’s 12 state universities, estimated to be worth $17,000 in 2038.
  • Option 2: Lump sum payment of $7,373.92 upfront for same estimated benefit.

---

6. The History and Decline of Prepaid Plans

(05:02–05:35)

• Prepaid plans pre-date today’s popular 529 Savings Plans.
• States shifted to savings plans due to complexities and risks in guaranteeing future tuition.
• Many states have closed their prepaid tuition programs.

Quote:
“There used to be a lot more states that offered them, and many states have closed their prepaid plans.”
— Cheryl Winokur Monk (05:02)

---

7. Importance of Researching Plan Details

(05:35–06:02)

• Each state’s plan is different in price, eligibility, portability, and rules.
• Most have in-state residency requirements, though definitions and restrictions vary.
• Research is essential to understand what’s available locally and any restrictions.

Quote:
“…all different price points and rules…different rules on where you can use the money and whether you can use that money out of state. You definitely have to do your research.”
— Cheryl Winokur Monk (05:46)

---

Notable Quotes

• “It is kind of what it says it is.”
  — Cheryl Winokur Monk (03:30)

• “You definitely have to do your research.”
  — Cheryl Winokur Monk (05:46)

---

Timestamps for Key Segments

• 00:36: Host introduces the college cost problem and Cheryl Winokur Monk.
• 00:49: Cheryl explains what prepaid plans are and how they work.
• 01:44–02:24: Comparison between prepaid plans and traditional 529 savings plans.
• 03:01–03:20: Discussion of state and private plan options.
• 03:53–04:59: Walkthrough of a specific Florida plan example.
• 05:02–05:35: Brief history and decline in the number of prepaid plans.
• 05:35–06:02: Advice on researching available plans and their restrictions.

---

Takeaways

• Prepaid college tuition plans can help families lock in current tuition rates but come with restrictions and risks; they are less flexible than 529 savings plans.
• Each plan varies by state and provider—thorough research is essential to understand eligibility, rules, and portability.
• Guarantees depend on the state and the specific plan; not all plans are state-guaranteed and not all allow funds to be used nationally.

---

This episode provides a clear, practical guide for parents considering how best to manage college savings—especially if considering prepaid tuition plans as an option to mitigate future tuition increases.

Transcript

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Advocate for Durbin Marshall Bill]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Advocate for Durbin Marshall Bill]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Representative]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

Here's your Money briefing. I'm J.R. whalen of the Wall Street Journal in New York. The cost of higher education is skyrocketing and it has driven student loan debt in the US to record levels. Should parents think about prepaying for college

[Cheryl Winiker Monk]

installments from day one and you're contributing a target amount? Say, maybe it could be the cost of a semester. It could be even a year. It could be four years. And it's a calculation that takes into account today's rate. And then what happens is that money grows. The plan operators will promise that that money will grow to an amount that can be used. It will match college costs down the road.

[J.R. Whalen]

That's Wall Street Journal contributor Cheryl Winiker Monk. She'll outline just about everything you need to know about prepaid college plans. Coming up. Americans hold more than a trillion dol in student loan debt. And with the cost of higher education likely to keep climbing, parents of young children have an pre paying for college tuition, which could ease the financial burden later on. Wall Street Journal contributor Cheryl Winokur Monk joins us to explain.

[Interviewer]

So, Cheryl, how does this work? You actually contribute to a fund.

[Cheryl Winiker Monk]

You contribute to an account similar like you would for a 529 savings plan, and you're contributing a target amount. Say maybe it could be the cost of a semester, it could be even a year, it could be four years. And it's a calculation that takes into account today's rate. And then what happens is that money grows. The plan operators will promise that that money will grow to an amount that can be used. It will match college costs down the road, or they'll make up the difference in most cases.

[Interviewer]

Okay, so in this account, it does not rise and fall with the markets.

[Cheryl Winiker Monk]

That's correct.

[Interviewer]

And how is this different from a traditional 529 college savings plan?

[Cheryl Winiker Monk]

Traditional 529 savings plan typically rises and falls with the market, although in Some cases, traditional 529 savings plans are offering more guaranteed returns, which is similar to this. But generally speaking, prepaid tuition plans have more constraints than a traditional 529 savings plan they just some of them have, or many of them have in state residency requirements. So there are limits on who can contribute. Whereas with a traditional 529 savings plan, you can pick a plan even if you're not living in that state.

[Interviewer]

And it's states that offer these prepaid college plans, is that right?

[Cheryl Winiker Monk]

For the most part, states are the ones that offer these. But there is a plan called The Private College 529 plan, which is a plan that's available for nearly 300 private colleges and universities around the country. So there are ones like mit, Princeton University, Stanford University and many others.

[Interviewer]

Now the plan operators, as you mentioned, they promise that the amount of money in your account will grow to match college costs down the road or they'll

[J.R. Whalen]

make up the difference.

[Interviewer]

That seems a little too easy.

[Cheryl Winiker Monk]

Well, in many cases the states are guaranteeing it. Not always, but in many cases they are. It is kind of what it says it is. The problem or the issue would be whether you actually go to college in that state or, or. And if you decide not to go to college in that state, some plans let you do that and some plans don't let you use the money for those purposes.

[Interviewer]

Now, can you take me through the scenario where a family would make payments

[J.R. Whalen]

to afford college in Florida?

[Cheryl Winiker Monk]

Sure. Just keep in mind it's going to depend when the child is born. So for this example that I'm going to give, it's a child born on December 10th of this year and the family is going to have to meet the state's residency requirements. So just those things are givens for this scenario. One option might be for the family to make 223 payments of $46.61 a month, which would total $10,394.03 for a one year Florida University plan. So that could be used for one year at any of the 12 state universities. And that would be for an estimated future benefit beginning in 2038 of $17,000. So that's a total of $10,394 and change for a total benefit of $17,000. If you didn't want to do the 223 payments, you wanted to do a lump sum payment, you could pay $7,373.92 at the outset and you'd still get that estimated benefit of $17,000.

[Interviewer]

Is this idea of prepaying for college something new?

[Cheryl Winiker Monk]

It's actually not. These were the precursors to the today traditional Savings Plan. The 529 Savings Plan and then just, I guess the states decided to offer more choice. And guaranteeing these can be complicated for states. Whereas within a traditional 529 savings plan, there is no guarantee usually. So it's actually a better bet in some cases for states to do the traditional 529s, which is why fewer states are offering these. There used to be a lot more states that offered them, and many states have closed their prepaid plans.

[Interviewer]

And there are lots of differences across various prepaid plans that are offered by states. So if you do want to research and find out if your state offers one, you should get to know what the rules are as compared to somewhere else.

[Cheryl Winiker Monk]

Absolutely. There are all different price points and rules. And some plans have in most plans have in state residency requirements, but that can mean different things. They can have different rules on where you can use the money and whether you can use that money out of state. You definitely have to do your research.

[J.R. Whalen]

All right. That's Wall Street Journal contributor Cheryl Winiker

[Interviewer]

Monk joining us on the line. Cheryl, thanks for coming on the thanks for having me.

[J.R. Whalen]

And that's your money briefing.

[Interviewer]

I'm JR Whalen in New York for

[J.R. Whalen]

the Wall Street Journal.

[Charles Schwab Announcer]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day, but what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonW.