Money

Why a Prepaid College Savings Plan Might Be Wise

By Stacey Bradford

Updated on: April 5, 2009 / 5:17 PM EDT / MoneyWatch

Let me tell you about a way to save for college that comes with a guarantee: the prepaid college savings plan. But it's controversial.

A prepaid college savings plan lets parents lock in today's tuition prices, provided their child goes to one of the plan's member schools. This program is currently offered by 12 states -- Alabama, Florida, Illinois, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Tennessee, Texas and Washington as well as by the Independent 529 Plan, a consortium of over 270 private colleges. (Colorado, Kentucky, Ohio, South Carolina, Virginia and West Virginia also have prepaid plans, but they aren't taking new families. Oregon and California are considering starting plans.)

Last July, my husband and I had extra cash to put toward our daughter's future college education. But we were gun shy about the market. Then we stumbled on the Independent 529 plan and decided to put our cash there. Seems we weren't alone. Enrollment in prepaid plans rose 6 percent through September.

But when I ran the idea of using the I529 past financial planners and college financing experts, they balked. They didn't see why I would limit my daughter's choice of school when I could instead invest in the market (10 percent annual return historically) and earn more than the average annual tuition increase of seven percent.

We weren't confident we could earn 10 percent a year. (Can you blame us?) So we made a trade off. In exchange for graduating with no debt, our daughter will have to limit herself to one of 270 schools, which doesn't seem like such a hardship to me.

If she doesn't go to one of the colleges, I can do one of three things:

Get a refund, though the amount might be less than the actual tuition cost at another school
Roll over the money to a state-sponsored 529 plan, tax-free
Change the beneficiary to another child who might use the plan

One other caveat: Some prepaid plans are running short of cash due to the market declines and rising tuition. Seven states say they'll back their prepaid programs if there's a shortfall. Independent 529 Plan investment advisor TIAA-CREF says its schools have guaranteed to honor all certificates for account holders. Should that change, I'll keep you posted.

Be sure to research a prepaid plan on a site like Savingforcollege.com before investing.

My question for you: would you be willing to limit your child's college choice if you could lock in today's tuition prices? I'd love to hear your opinion.