By Joshua Benton
It’s a tough choice: Write a big check now or a huge one later.
Texas parents have 15 more days to make up their minds.
The Legislature is considering a steep hike in college tuition, perhaps more than 60 percent over the next two years. As a result, the Texas Guaranteed Tuition Plan, which lets parents pay Junior’s future college tuition at today’s cheaper rates, has seen interest boom.
The number of people signing up for the plan – formerly known as the Texas Tomorrow Fund – is up 37 percent over last year at this time. Officials expect a huge rush in the final days before this year’s deadline to sign up, May 23.
Some financial advisers say rising tuition and economic forces may conspire to make this the last time the guaranteed tuition plan is such a deal. In the future, families may find a better investment elsewhere.
“People signing up are going to be paying a premium,” said Joe Hurley, a CPA who runs Savingforcollege.com. “They’re really making a gamble.”
For decades, Texas was one of the cheapest places in America to get a college education. But it’s catching up to the pack. Average tuition at a four-year Texas university jumped 63 percent in the 1990s, even after adjusting for inflation.
It’s not yet clear how much freedom the Legislature will give universities to raise tuition. A bill passed by the House last month would raise the cap on tuition 61 percent over the next two years and give some colleges free rein to charge whatever they’d like in 2005. A Senate version of the legislation allows smaller increases – up to 17 percent between now and 2005.
Some sort of compromise is likely, but even then, not all universities will raise tuition to the maximum allowed immediately.
Those are the sort of increases the Texas Tomorrow Fund was created to battle in 1996. The idea was simple: Parents pay for college ahead of time, either in a lump sum or monthly payments. The state invests the money; if all goes well, the investments grow faster than tuition does and there’ll be plenty of money to pay for children’s college down the road.
“You’re getting a guaranteed return on the money you’re putting in, since tuition keeps going up” said Henry Tow of Plano, who signed up two of his children last month. “I know I won’t be losing money.”
It’s clear that those who bought in early got a deal. In 1996, the parent of a newborn could have bought four years at a state university for $8,320. That costs $17,460 today.
If that $8,320 had been invested in a common stock index fund instead, it would be worth only $11,730. Move the starting date forward a couple of years – to the late-’90s stock bubble – and many parents would be in the red.
“You were a genius if you bought a plan in ’96,” said Andy Ruth, director of special programs in the state comptroller’s office, which runs the program. “People who bought back then can congratulate themselves. They were very smart.”
He said interest in the program has picked up in the last few years, as the stock market’s troubles make people seek sure bets.
What’s unclear is how good of a deal the guaranteed tuition plan will be in the future. After all, the plan’s theory is based on getting good returns from investing the parents’ up-front cash – returns that grow faster than tuition. Instead, Texas has had a stagnant economy and spiking tuition.
Bryan Clintsman, a Southlake financial planner, often advises his clients against the guaranteed tuition plan. His argument: If the fund has given such a great deal to its early adopters – paying out more in tuition than it received upfront and earned from investments – it has to make up the difference somewhere.
Mr. Clintsman thinks that somewhere will be the pockets of parents joining the plan in the next few years.
“You’re paying a premium for the people who got in before you,” he said.
It’s a problem that other states are already facing. In March, West Virginia officials announced they would not allow any new parents to sign up for the program for one year. Last August, Colorado officials informed its program’s parents that the state may not be able to pay the full cost of tuition and offered them a chance to withdraw their money.
Such a scenario isn’t likely in Texas. The fund is backed by a trust fund created by a constitutional amendment, and the state guarantees that all program obligations will be met, with tax dollars if necessary. In Colorado, no such guarantees were made.
But that doesn’t mean the price won’t go up. In Florida – home to the nation’s largest prepaid tuition plan – officials have said they may need to double the price of a contract next year if the state Legislature increases tuition as much as being considered.
“It puts a financial strain on these programs whenever there’s a large increase,” Mr. Hurley said.
It’s impossible to know how much the price of a Texas contract might increase, Mr. Ruth said. The prices are set using a complex actuarial formula, based largely on what tuition rates are at Texas schools each fall and their projected rate of increase.
“Just because it’s been a great deal for people in the past doesn’t mean it won’t be a great deal for people in the future,” he said.
Mr. Clintsman and other advisers said they were steering their clients to the state’s sister plan: Tomorrow’s College Investment Plan. It’s what tax aficionados call a 529 plan, and it functions like a 401(k), allowing money invested to grow tax-free.
It lacks the guarantee that the other plan does – it’s possible to lose money in a 529 savings plan. But it does have a few advantages.
First, the guaranteed tuition plan covers only tuition and required fees – not the costs of room, board, books and other costs, which can in many cases add up to more than tuition alone. “Tuition’s just a piece of the pie,” said Bob Stowe, a Plano financial adviser. “You’ve got to take care of everything else, too.”
Second, if students are eligible for financial aid, the guaranteed tuition plan can limit the size of the grants they can receive. For every $100 accumulated in a guaranteed tuition plan, a student is eligible for $100 less in aid.
The 529 savings plan is treated differently: For every $100 saved, a student loses only $6 in potential financial aid.
When Doug and Patti Overstreet of Fort Worth started thinking about their college options for their 6-month-old son, Cole, they considered the guaranteed tuition plan. They found it attractive but ended up choosing the 529 plan.
“Eighteen years really won’t be that long,” said Mr. Overstreet, a claims adjuster. “Your money doesn’t have that much time to work for you. You’re going to look up one day and you’ll be starting elementary school. Then middle school, then high school. College will be here soon enough.”