College Tuition Savings Programs

Q: I'm currently enrolled in my state's college fund - the Texas Tomorrow Fund - essentially paying tomorrow's tuition costs today. I want to know the advantages and disadvantages of this program in comparison to 529 college savings plans.
- John, San Antonio, TX

A: I applaud your foresight. Too often folks don't start setting aside funds for college until it's right on top of them! It's amazing how fast 18 years can fly by. The 529 plan comes in two basic flavors: prepaid tuition and savings plans. Your plan, the Texas Tomorrow Fund (now the Texas Guaranteed Tuition Plan) is a "prepaid tuition plan" which, as you said, means you are theoretically buying tuition credits at today's prices for future use. The Texas prepaid fund was closed to further enrollments back in 2003 because the state feared rising education costs and the liability they represented. That should get you to sit up and pay attention as that's one reason why it's not my favorite approach to saving for college. That said, the neat thing about this type of plan is that the state bears the risk of rising education costs, not you. Since you buy "units" or "semesters," as long as the state is solvent, your child will be headed for college in Texas.

On the other hand, with the 529 college savings plan you accumulate funds in a variety of investment vehicles, such as no-load mutual funds, and use those monies to pay for your child's education at the time she is in school - you bear the burden of rising costs. The good news is that your child can use that tuition money in any state for private or public college including some international universities as well. It really provides nice flexibility. Whereas the typical prepaid plan will cover the cost of any public university within the state, however, in most cases if your child goes outside of your state the plan will only provide funds equal to the average cost in your state - this could be quite a penalty! Good luck!

The preceding discussion is not tax or legal advice. Consult your tax or legal professional regarding your specific situation.