Prepaid Tuition Plans May Protect Against Stock Market Volatility

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Mark Kantrowitz

By Mark Kantrowitz

April 28, 2020

Prepaid tuition plans provide parents with peace of mind because their investment returns are linked to tuition inflation instead of stock market fluctuations.

A prepaid tuition plan lets parents buy tuition at today’s prices (plus a premium), thereby avoiding increasing college costs and stock market instability. Prepaid tuition plans give them cost certainty.

“A longtime account owner told us recently about his experience with the Plan during the great recession. The thought that ran through his head while paying his daughters’ tuition was that he didn’t have to worry about what the market was doing, so he didn’t.” said Bob Cole, president of the Private College 529 Plan.

Stock market ups and downs are unavoidable. The stock market experiences at least three corrections and at least one bear market in any 17-year period. This is why 529 college savings plans encourage participants to manage the risk of their investments by using an age-based asset allocation.

Prepaid tuition plans do not suffer from stock market gyrations, at least not directly. Prepaid tuition plans invest in the stock market to meet their future obligations to families. Because of this, some prepaid tuition plans suffer from actuarial shortfalls and unfunded liabilities. Others have experienced surpluses, such as the Florida and Washington prepaid tuition plans.

About half of the prepaid tuition plans offer some form of guarantee, such as backing by the full faith and credit of the state. The Private College 529 Plan requires participating colleges to accept less than full tuition and fees if the prepaid tuition plan fails to keep pace with tuition and fee increases.

Prepaid tuition plans also present a hedge against tuition inflation.

Although some colleges may freeze tuition while the coronavirus pandemic is ongoing, tuition increases are likely to follow. College enrollment is expected to drop this fall by as much as 10% to 20% as students stay closer to home or take gap years. Public colleges may experience cuts in state appropriations due to declines in state tax revenue, forcing above-average increases in public college tuition.

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