Saving for college – Prepaid Tuition Programs

vertizontal · January 30, 2011, 3:47pm

I’m finally getting around to saving for college for my two kids (ages 9 and 7).

I’d been looking specifically at the College Illinois! 529 Prepaid Tuition Program.

It seems like the smart thing to do, but in light of the financial problems that the state of Illinois is going through, is it still a good idea to invest in this, or should we lean towards some other investment vehicle?

My main concern is that through College Illinois, the tuition is not guaranteed. Here is what their web site says in FAQs:

“Neither the taxing power nor the full faith and credit of the State of Illinois is pledged to the payment of program contract benefits.

However, your contract and Illinois law provides additional safeguards to enhance the security of your investment. Illinois law and the program contract provides that in the unlikely event that the College Illinois! 529 Prepaid Tuition Program ever faces a funding shortfall, the College Illinois! 529 Prepaid Tuition Program will go to the governor of the State of Illinois and ask him or her to go to the State legislature to request enough money to cover the costs of either paying out your benefits or paying a refund of all your contributions plus the appropriate amount of interest. Under Illinois law, the Governor is required to make that request on behalf of the program.”

So, in ten years, if the money is gone, the Governor will go to the state legislature to ask for money.
Suppose they say “Sorry, we don’t have any”.

Am I just being paranoid?
Of course catastrophic things are always possible – global thermonuclear war, earthquakes opening the earth and swallowing Illinois whole, giant asteroids falling on our heads – but I’m not concerned about those extremes.

Does it still seem reasonable to start investing in something like College Illinois for my kids’ college education?

fruitbat · January 30, 2011, 3:56pm

It is a concern that the state will not be able to fund its obligation. Many states do back the prepaid tuition plan with a more robust set of guarantees. To me the bigger concern is the relative lack of flexibility in these plans. Things to consider are:[ol]
[li]They cover tuition only[/li][li]They are to be used in your home state, if you use the benefit for a private school or a public school in another state your benefit is less robust[/li][li]The return on investment is modest even in the best outcomes[/li][li]You obligate yourself to a fixed payment rather than a variable amount[/li][/ol]

I see these as appropriate for parents who intend to limit their children to an in-state education, are conservative investors, and have the resources to continue making payments even if their financial situation deteriorates.

There are other choices. Illinois has the BrightStart 529 plan that allows flexible contributions to a portfolio of funds (I would use the index based option). This is your money to be used for any school anywhere in the country and can be used for tuition, fees, room and board. Unlike the prepaid you are not guaranteed that you will have enough accumulated to pay for school. I tend to think though that the added flexibility and the financial footing of Illinois would lead me to prefer that option.