By Teresa McUsic,
THE SAVVY CONSUMER
How high do you think tuition rates will climb in the future?
If you predict double-digit growth for in-state undergraduate tuition over the next decade or so, or you just want a place to lock in today’s tuition rates and save for college, Texas offers the Texas Promise Fund to pre-pay tuition.
The current enrollment period closed on February 28, but will reopen again September 1, with updated prices based on Texas college costs for the 2015-16 academic year.
The fund, which began in 2008, allows participants to purchase tuition units based on current prices to avoid future increases in tuition and fees at Texas public colleges and universities. If the prices increase, the schools must make up the difference, according to state law.
So far 33,596 contracts have been taken out on the plan, according to the Texas Comptroller’s office, which oversees the program. More than 1,200 are now attending college using these funds.
The Texas plan is a relatively good deal compared with the dozen other states who have a similar plan, said Joseph Hurley, a certified public accountant and founder of www.SavingForCollege.com.
Hurley gave the Texas Promise Fund four out of five caps for its financial benefits, safety, features and reliability.
“It’s unusual where you can invest in a prepaid plan at today’s prices,” said Hurley. “Most states’ prepaid plans have a large premium over the current prices of today.”
The Texas plan is also unusual in making the state schools pick up the difference in the costs as the funds are being used, Hurley said. Only a couple of other prepaid plans have this feature, and then it’s on a voluntary basis by the school, he said.
While college costs have risen dramatically over the past few decades, the increases have slowed, Hurley said.
The College Board reports that overall in-state tuition at public four-year schools has grown 17 percent over the past five years, but just nine percent in Texas. For this school year, U.S. tuition at public four-year schools averaged $9,139, with Texas schools averaging just under $9,000.
“Overall, there is a general trend toward more moderate tuition increases relative to past cycles,” Hurley said. “Whether you want to invest in a prepaid fund depends on how you sleep at night. Prepaid funds are for people who don’t want to have to worry about tuition in the future.”
Under the Texas Promise Fund, families can prepay tuition and school-wide required fees for a four-year degree, two years of community college or even a few semesters by purchasing one set of three different sets of tuition units. One plan goes towards community college, another for the average weighted tuition of all four-year colleges in the state and the third set for the highest-cost colleges in the state.
Money in the fund can also be used for out-of-state or private schools as well, although students will have to make up the difference in cost. Consumers have three ways to buy the plan: in a lump sum, on a monthly or annual installment plan, or on a “pay as you go” investment as new versions of the plan roll out in future years.
The enrollment fee is $25 and the interest rate cost for those who pay in monthly installments is 8 percent.
Helen Stephens, a certified financial planner with Fort Worth-based Aspen Wealth Management, thought the 8 percent interest for the installment plan was a high fee relative to 529 college savings plans like the one she recommends offered by Vanguard. She also was concerned about the refund policy, which limits a participant to two percent less than the actual earnings with a cap at 5 percent.
“I prefer a 529 for a myriad of reasons, including that they have no interest on installments and don’t have earnings caps for refunds,” she said.
Kevin Lyons, spokesman for the comptroller, said the 8 percent charge for installments helps defray the impact of tuition increases and lost interest over the life of the contract. Still, only around one-third of those who have purchased the fund pay in installments with the rest paying with a lump sum or intermittent payments, which have no extra costs involved.
Meanwhile, refunds are capped to maintain the actuarial soundness of the plan, Lyons said. The cap is also a way to address the IRS expectation that this is a program that prepays tuition, he said.
“It isn’t intended to be an investment,” Lyons wrote in an email.
For more information on the Texas Promise Fund and to find an application, go to www.TuitionPromise.org, or call 800-445-4723, option 5.
Teresa McUsic’s column appears Saturdays in the Fort Worth Star-Telegram. TMcUsic@SavvyConsumer.net