If tuition rates grow as fast as 7-pound, 4-ounce Christina Leigh Richter will, her mother should consider setting aside cash now for the four-day-old’s college education.
“It’s hard to think ahead that far,” said Amy Richter, who on Monday gave birth to Christina at Fairview-University Medical Center. Yet, she concedes that the idea is appealing.
And colleges across the country are stepping forward with prepaid tuition plans to allow parents to get a jump on their children’s future educations while taking advantage of current tuition prices.
Parents purchase tuition contracts when their children are young, and then apply the credit when their child enrolls in college.
While the University does not offer such a plan, it has a powerful backer in Board of Regent’s member Warren Larson. A father of two grade-school aged children, the Bagley, Minn. resident has long advocated pre-paid tuition.
“It allows parents to plan ahead,” Larson said. “It would be a good package to benefit students and the University.”
From the school’s standpoint, it fosters long-standing relationships and gives them money to invest years ahead of student’s attendance.
A cautious approachDespite the advantages, University administrators remain cautious.
“It’s just adding one more nuance that probably doesn’t make much sense now,” said Bob Kvavik, associate vice president in the Office of the Provost.
Prepaid tuition would be labor intensive, requiring an increased staff and possible administrative changes. How that extra work would be accomplished is a big question, Larson admits.
“We’re discussing this at a time when we’re reducing budgets and becoming more streamlined,” Larson said. “There’s a lot of things we’d need to learn before we put it in place.”
The closest thing the University has to a prepaid program is a pilot program of guaranteed tuition. Students pay a fixed, slightly higher rate for four years under the assumption they’ll have paid less by graduation.
About 150 students took advantage of the plan in the past four years.
Minnesota is content with the state of its higher education financial offerings, and has no immediate plans to follow the prepaid trend.
A strong scholarship and grant program, coupled with two new tax-exempt savings approaches, present lucrative opportunities for parents, Rep. Lyndon Carlson, DFL-Crystal said. He referred to the EdVest and Gopher State Bond programs passed last legislative session.
Based on the array of choices available to parents, Carlson said prepaid tuition appears unnecessary.
“Minnesota’s doing a lot of things that accomplish the same end,” Carlson said.
Despite its advantages, the incentive offered in 18 states — including Virginia, Ohio and Florida — prepaid tuition has its share of critics and misconceptions.
A concern that future students are locked into attending the school their parents initially choose is a commonly misconstrued view, said Diana Cantor, director of the Virginia Prepaid Tuition Program. That state’s plan stresses flexibility that dispels this worry, she said.
Flexibility in the future
Virginia’s prepaid contracts are valid at private or state institutions, so future scholars have the freedom to choose different schools. The state holds onto the money until the child enrolls.
The interest on the investment is exempt from state taxes, and is susceptible to federal taxes only after the child enters college.
Students are allowed to transfer, and if they choose to forego college altogether, the credit may be used toward a younger siblings’ education. After a certain time frame, students can receive a full refund if they don’t attend college.
“It gives families a lot more flexibility in the future,” Cantor said.
Some families might gain more flexibility, but with the programs squarely aimed at the middle class, not everyone will be able to afford it.
“There could be some political unrest,” Larson said. “I think there’s a certain population that may feel left out.”
Financial planners advise those contemplating prepaid tuition to research and know what they are getting into. Depending on the plan, there are different levels of stringency regarding where credit is used and how it can be transferred, and returns on the investments can be low.
Mutual funds and other investment avenues may be just as fruitful, experts said.
In addition, the prospect of prepaid tuition for many young parents still paying off college debts themselves is irresistible.
Saving for retirement is usually a high priority, but saving for college often sneaks up on parents and gets lost in the shuffle, Cantor said.
“Parents of very young children don’t think about the cost of college,” Cantor said, but added, “It hit reality home to me.”
With three children under the age of 10 and tuition costs rising constantly, Cantor took advantage of Virginia’s plan and opened contracts for each of her children.
A concerted interest
She’s not the only one, either. More than 21,000 newborns through ninth graders were enrolled in the Virginia plan since December 1996.
The Virginia plan involves individual contracts purchased at current tuition prices.
Although private schools are included in several plans, including Virginia’s, only one specifically targets the private school market.
KIDSFUTURE, operated trough New York’s Tuition Credit Exchange, Inc., is the only national program for private, non-profit schools.
“I think one form or another of prepaid tuition will be a major way people will pay for college,” said Lorne Worthington, president of Tuition Credit Exchange, Inc.
The organization began sending contracts to interested institutions late last year, and individual plans will be sold when there are 100 participating colleges. This will happen soon since they are adding the 100th school at this time, Worthington said.
The New York company’s plan differs from programs like Virginia’s in several ways, the main variation being actual credit hours are purchased versus investment contracts. It gives the college the opportunity to actually sell something of value rather than looking for donations,” Worthington said.
In this respect, KIDSFUTURE is less of an actual investment program.
Unlike Virginia’s program where the state manages the money, contributions collected through KIDSFUTURE is made directly available to the schools. This allows the school to reinvest the money up-front.
“The more I think you narrow it, the more bureaucracy and junk you’re creating,” said the University’s Kvavik said. “Give the families and the students the capacity to manage their money and keep the state out of it.”
The best step for families is to simply let them save their money and get the most from their returns, Kvavik said.
But, given the chance, Richter would be happy to get it out of the way.
“It’d be kind of worthless not to,” she said.