Should I start a prepaid tuition plan for my child?

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Question:

I want my daughter, who is now 11 and doing great in school, to go to the same college I did -- which happens to be a state school, in the same city where we now live. Is prepaying tuition at that school a good idea?

Answer:

Prepaid tuition plans are a mixed blessing. As the name implies, they let you set aside tuition in advance, at current rates -- so even if tuition went up in the seven or so years before your daughter goes to college, you wouldn't have to make up the difference.

In technical terms, you buy tuition shares or credits within a state-run investment account, which is guaranteed to gain in value at the same rate as tuition. And although you can't take a tax deduction for the tuition payments, you won't owe any tax on your account's increase in value.

But what if your daughter decides she wants to go to a different college? If it's also a public college administered by your state, you'll in all likelihood be able to use the account there as well. However, that may not work if it's a private college or an out-of-state school (it depends on the terms of your state's plan). Some plans will let you transfer your money to another school, but if not, you'll simply have to take a refund or, if you have younger children, transfer the plan to one of them. And of course, if the new school costs more than your local state school, you'll have to make up any difference in tuition costs.

Look carefully at the terms and conditions of your state's prepaid tuition plan before signing up. You might be better off saving all or at least part of your money in a more widely useful college savings plan, such as a 529 or Coverdell ESA. (To learn more about 529 plans and Coverdell ESAs, read Nolo's article Education Savings Plans for Your Child.)

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