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Are Prepaid Tuition Plans in Trouble?

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A recent article from the Dallas News alerted me to a problem with the Prepaid Tuition 529 Plan in Texas. Originally, the plan let investors withdraw their funds, plus earnings, even if the designated beneficiary wasn’t going to college in Texas. Now, however, the state of Texas is amending that benefit: If investors don’t use their plan to pay for school in Texas, they get only the value of their original investment, without any of the interest.

What gives? Apparently, the longhorn plan is running in the red, to the tune of almost $2 billion by 2030. The Texas Legislature deregulated tuition rates in 2003, and that’s when tuition started to skyrocket — much faster than the fund could keep up with. Anticipating this problem, the pre-paid tuition fund was closed to new enrollees in 2003. But the fast-paced rate of tuition inflation has averaged 8.9% a year, while return on investment has been just 4.4%.

Texas is giving families until the end of November to withdraw funds with the interest still attached; after that date, the policy will be changed. While this particular crisis is unique to Texas, I thought the article had national value for anyone investing in — or considering investing in — a 529 pre-paid tuition plan.

First off, as Savingforcollege.com founder Joe Hurley says in this article, the Texas situation is setting a precedent:

This is the first time I can recall that a 529 plan has gone back on its promises in a big way.

More so, however, the pre-paid short-fall is a good opportunity for us to revisit the difference between the two types of 529 Plans.

There are 529 pre-paid tuition plans, like this one in Texas, which allow parents to buy x number of future semesters of tuition at the in-state university at today’s cost.

Then there are 529 college savings plans, which are an investment vehicle for saving money for future college expenses. Your return on a college savings plans is dependent on the type of investment vehicle you choose and how the market does.

To learn more about 529 Plans, check out some of these articles on the Financial Aid Finder:

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