SEATTLE — Have you heard the hot investment tip racing through the preschool parking lot?
Prepaid college tuition, a conservative approach to college savings, can be a gold mine of the current economic crisis.
Parents who bet that college tuition would go up faster than the stock market — an idea laughed at a few years ago by more savvy investors — are now bragging about their financial acumen.
In this case, the down economy works for parents instead of against them. Declining state revenue forced state universities to boost tuition, making the effective return on pre-paid tuition much higher. Meanwhile, parents who trusted in the stock market to pay those bills are looking at a lengthy recovery.
Jim Chapman of Woodinville started pre-paying into the Washington state program when his son, Alex, was a freshman in high school.
Alex Chapman is now a freshman at Cascadia Community College and Jim Chapman — who has since lost his job — is still able to pay the tuition bill thanks to the $22,000 investment he made during Alex’s high school years.
The Chapmans are coming out even this year — both tuition and the amount they prepaid adds up to about $900 a quarter — but as tuition passes $1,000 next year, the Chapmans’ contribution will hold steady.
The numbers are more dramatic for students at four-year universities.
They look so good, some states like Colorado, Ohio and Kentucky have stopped accepting new investors into their prepaid tuition plans and others, like Washington, are raising their rates dramatically to make up for shortfalls.
The director of Washington’s Guaranteed Education Tuition program says even with a 33 percent increase in prepaid tuition, the program is such a good deal her staff is talking about making its status as a smart investment the focus of next year’s marketing campaign.
“It’s still a great deal,” insists program director Betty Lochner.
Parents who buy tuition credits at $101 a unit after this week’s price increase will be paying more than $10,000 for a year at the University of Washington or Washington State University, where tuition will be just under $8,000 next school year.
If tuition continues to go up an average of 7 percent a year — less than the 14 percent approved by lawmakers for the next two years — it will take only four years to come out even on the investment.
At 14 percent a year, it takes about two years to break even, so even parents of high school kids could save money by enrolling in the program.
“In two to three years from now, it’s going to seem like a bargain,” said Lochner, on the phone from the recent national meeting of the College Savings Plan Network in Atlanta. She said one of the themes at the meeting of people who run state college savings programs is “Don’t panic, plan.”
Although most other college investments lost money in the stock market meltdown, professional investment advisers acknowledge the success of prepaid tuition plans in the current economy but they’re not as excited about them for the future.
“Everyone who owns GET plans, they’re starting to look like geniuses,” said Joe Hebert of TrueNorth Financial Services in Seattle.
But if the stock market improves, as he expects it will, prepaid tuition will go back to being a sensible choice for parents of young children.
Parents of newborns can expect tution to be 3.5 times today’s rates by the time their children start college, Hebert said. So an investment of $10,000 for a year’s tuition will increase to a value of about $35,000 in 18 years — a little more than 7 percent interest a year.
Hebert bought into the Washington GET program when his teenage daughters were babies because he considered it a good insurance policy. Most of his college savings is invested elsewhere, however, because tuition makes up only about a third of the cost to send your kids to college.
People who put their college savings in the other kind of state savings program, a 529 plan, a tax-free investment plan that comes with no guarantee, are likely feeling less confident after some plans lost 30 percent of their value during the past year.
“I don’t think people should be panicking,” said Joseph Hurley, founder of SavingForCollege.com. Parents of younger children have many years for the funds to bounce back before their kids go to college and for parents of older kids, there’s always financial aid, he said.
Both 529 savings plans and prepaid tuition programs have been hurt by the stock market. Price increases like the one in Washington state are the government’s way of making up for investment losses, as well as preparing for tuition increases, said Mark Kantrowitz, publisher of FinAid.org.
Kantrowitz said moving college savings into a more conservative investment mix may help, but the reality of college savings is similar to other investments: It’s very hard to predict the future.
Hurley said some people are considering delaying their retirement for a few years to devote more money to pay for college.
“Keep advancing toward that goal of having some money set aside for college,” he said. “Don’t be frozen into inaction.”
On the Net:
College Savings Plan Network: http://www.collegesavings.org/index.aspx
Saving for College: http://www.savingforcollege.com/
Financial Aid advice: http://www.finaid.org/
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