Pre-paid vs. stock plans offer array of savings choices
Molly Kerley may be a kindergartner, but she's already half way to college-as far as tuition payments go, anyway. That's because her parents enrolled in a prepaid tuition plan for Molly when she was a baby.
The Kerleys chose to buy another prepaid plan from College Illinois when their second daughter, Mary Kate, was born two years ago rather than opting for a riskier stock-market-based savings plan. "The prepaid plan is a very safe investment," says their dad, Michael Kerley of Elmhurst.
The prepaid program, offered November through March each year by College Illinois, locks in tuition at today's rate, allowing parents of future college students to avoid sharp tuition increases. It's possible to buy nine semesters of tuition in one lump sum payment-although the cost can be as high as $33,983 depending on the age of the child. But there are a variety of programs and payment options that start as low as $45 a month.
The prepaid plan is only one college savings option. The parent of a 4-year-old, for example, might choose a riskier stock plan because the longer period offers more time for the money to grow. The parent of a 16-year-old, however, might choose a bond-based savings plan to decrease the chance of losing money just as the child enters college, says 529 plan consultant Richard Feigenbaum.
Before 2001, families were lining up to join stock-based savings plans. But many lost money when the market faltered, and prepaid plans, such as College Illinois, took off. "We saw a resurgence of popularity last year, and it has to do with what's going on in the market," says Nancy Stephens of College Illinois, which reported enrollment grew by 13 percent in 2003. Open enrollment ends on March 31.
Parents with money in Bright Start, a stock-based savings plan, took a beating in the stock market drop and are off about 7 percent from 2000. "It's a basket of investments that goes up and down, just like the stock market does. But the market has charged back," says Feigenbaum.
Parents should do their homework on specific benefits before buying into any college plan, says Chris Hunter at the College Savings Plans Network. In particular, check out federal and state tax benefits for each type of plan, as well as the fees and penalties that apply. For example, Bright Start accounts charge a yearly fee of about 1 percent of account assets and early withdrawals are assessed a 10 percent penalty and income taxes.
Stephens predicts Illinois college tuition will continue to rise steeply. "We think we're in for at least one more year of tuition hikes," she says. According to estimates, eight semesters' tuition at a state university will cost more than $115,000 in 10 years. That's before room, board, books and computers.
For more information on college savings plans, visit www.collegeillinois.com, www.brightstartsavings.com or www.collegesavings.org.