Photo: A field of bluebonnets, the state flower of Texas.
The other day, I was messing around on the internet reading financial articles and I stumbled across a thing called The Texas Tuition Promise Fund. I was intrigued to see what was being offered and decided to do some more research. Texas and other states have college pre-payment programs that can be used by your kids in college.
What is this program?
This is a college pre-payment program, where you are paying for college in the future at today's cost for college. By doing this, you could avoid tuition increases from the date that you take out the plan until your child goes to school. This is a state sponsored program and only applies to Texas public universities. This program also only covers undergraduate tuition and participants must be residents of the state of Texas. All earnings and any withdrawals for tuition are tax free. If the money is pulled out for other reasons, the earnings will be taxed at the normal capital gains rate. This program does not cover any other expenses associated with college. The state of Texas has created a great image showing the savings with this program when compared to ten years from now.
Enrollment is open every year from September 1 through February 28/29. Although, if you have a newborn after February 28/29, then you can enroll until July 31. When you enroll, there is a minimum of a three year holding period before the credits purchased can be used.
The Texas Tuition Promise Fund offers three different plan types. These types depend on each persons situation and where you child is expected to attend college.
- Type I: The most expensive 4-year universities in Texas.
- Type II: Weighted average of the cost to attend a 4-year university in Texas
- Type III: Weighted average of the cost to attend a 2-year college in Texas
To pre-purchase college, the purchaser of this plan will purchase credits that can be redeemed for the cost of tuition years down the road. The credits for each type has a different cost, but the cost of 100 credits are expected to pay for 1 year of college at today's rate. The current rates listed on the website are the 2015-2016 rates and have not been updated at the time of this writing. The costs associated with each plan type are listed below.
- Type I - 1 credit: $132.54 - 100 credits: $13,254 (1 year of tuition)
- Type II - 1 credit: $91.43 - 100 credits: $9,134 (approx. 1 year of tuition)
- Type III - 1 credit: $23.35 - 100 credits: $2,335 (approx. 1 year of tuition)
In both the Type II and Type III plans, 100 credits is an approximation, because the cost is an average of the schools. Some schools charge more and some schools charge less. Depending on the school attended, the amount of credits needed for a full year of tuition is dependent on the schools cost in 2015-2016. The type I credit is based on the most expensive school in Texas and 100 credits will be equivalent to one year of tuition at that school.
This plan allows you to use three different payment options.
- Lump Sum (25 or more credits at a time)
- Installment (cost of credits is locked in, but there is an interest charge)
- Pay-as-you-go (no interest charge, but the cost of credits is not locked in)
Along with the different payment options, the plan does charge a one-time $25 dollar administrative fee.
The money placed into the Texas Tuition Promise Fund is invested in a 529 plan. Even though it is invested in a 529 plan, there is no ability to invest the money in the market. Your money would be sitting there and the increase would come from the increase in tuition. When looking at historical data over the last ten years, that is an average increase of 5% annually. This is a better deal than any regular savings account. Your investment will grow at 5% annually on average. Last year, the increase was only around 2.9-3.7%, which is less than the average, but still better than a basic savings account or CD.
Texas also offers two other 529 plans for college savings. Both of these plans are 529 plans that allow investing. First, the Texas College Savings Plan can be used for all college expenses, not just tuition. The money placed in this account can be invested in 20 different investment plans that are offered. Secondly, the Lonestar 529 Plan can also be used. This plan is only offered through an investment professional. This plan allows you the opportunity to invest in any account in the market. Basically, it gives you more investing options than are offered in the Texas College Savings Plan. The state of Texas also warns that using the Lonestar 529 plan will lead to additional fees to pay for the investment professional.
Is it a Good Deal?
That's the big question. There are so many different savings tools that can be used, how do you know which one is the best. The ability to be able to invest for college in the future at today's cost is a pretty good deal. This plan would allow for you to gain on average 5% on your money and it is pretty safe investment.
In my opinion, there are a couple negatives with the Texas Tuition Promise Fund. First, safe investments like pre-paid tuition, savings accounts and CDs are safe because they are predictable. Your money grows at a mostly constant interest rate and there is no chance to lose any money. The safe investments do not make as much money over the course of the plan when compared to investing in the market. When looking at the history of returns in the stock market, you could estimate making around 7% when leaving your money in investments. Some data even points to the possibility of making 9-10% annually on investments. I always use 7% as a low estimate, because I tend to choose investments that have averaged 10% or more over their time in the market. The volatility of the market will allow you over time to make more on your investment than just pre-paying tuition will make you. The market will go up and down, but as long as you leave your college savings in investments for the long haul, then it makes more sense to invest in the market.
Secondly, the Texas Tuition Promise Fund does not guarantee that your child will be accepted into a college or university. That's right, you could be prepaying college and your child might not even get accepted into a Texas school. Thirdly, this plan will only save money for tuition. This money cannot be used for the other expenses of college. College costs a lot more than just the tuition. There is living expenses and books. Lastly, you lose a little bit of freedom. I prefer to use investment tools that allow me the opportunity to control where I am investing my money. Therefore, I do believe this is better deal than just saving in a CD or basic savings account, but it is not a better than investing long term in the market and reaping the rewards. Instead look at using a Educational Savings Account (ESA). An ESA is also tax deductible on the growth for all college related expenses and it allows the freedom to invest in the accounts that you want. Basically, the ESA gives you more freedom.
Investing for college is very important and can be a very overwhelming choice to make on the right place to invest your money for college. Do some research before you choose any plans. The research will help you feel more comfortable in the investments that you have chosen. This is a big decision and should not be taken lightly. Take the time to research different plans and make an educated decision based on what is best for your family.
Reaching the Financial Summit, Starts with You!
Note: All states offer similar plans to the Texas Tuition Promise Fund. Look into their plans, they may offer more than the plans in Texas offer.