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529 E-ditorials

01-8: Don't Fence Me Out - PART II
Joe Hurley
Thursday, August 30th 2001

Last year I suggested that the states offering tuition prepayment contracts permit nonresidents to purchase those contracts (529 E-ditorial 00-15). Now, to my considerable satisfaction, Alabama has decided to do just that. Beginning with the September 2001 enrollment period (take note, the annual enrollment period lasts for only one month), Alabama college alumni that do not live in the state but plan on sending their kids back there for school will be welcomed into Alabama's Prepaid Affordable College Tuition Program.

So will anyone else, for that matter. Want your kid to be part of the Alabama Crimson Tide and make sure you have the tuition covered? You now have that opportunity. (Remember, however, that participation in PACT does not mean your child will be accepted into any particular school.)

So what happens if you purchase Alabama's prepaid tuition contract and your child ultimately decides to attend Harvard or UCLA? The answer is that the contract value, calculated as the weighted average tuition and fees and Alabama four-year institutions, is available to pay Harvard's or UCLA's tuition.

This might be an attractive proposition. Alabama's weighted average tuition seems to be on a fairly steep incline. According to a survey by the Southern University Group, the University of Alabama is hiking its tuition and fees by 9.2% this year, following an increase of 4.9% last year and 7.0% the year before. Some other Alabama public universities are experiencing double-digit tuition and fee increases this year. And from the things I read, the upward pressure on state tuition and fees will continue in the future.

Even if your child ends up not going to college, recent changes in Alabama's program make the contract cancellation provisions less punishing. You will have your payments returned plus interest based on average bank passbook interest rates in Alabama (with a 5% annual cap).

Now I am not recommending that everyone rush out and purchase a prepaid tuition contract through PACT. There are a lot of considerations beyond your projection of future tuition increases as compared to the risk/return factors in a 529 savings program. For one thing, PACT contract prices vary considerably depending on the age of your child at the time of enrollment, and they will not accept an application once the child is beyond ninth grade. You should also be aware of the fees in this program, including a $75 enrollment fee and a $25 per semester out-of-state benefit transfer fee. Then there are all the other things to think about with regard to prepaid tuition plans in general, including the effect they can have on financial aid eligibility.

All I am saying is that it is nice that Alabama gives me another option in saving for my child's future college costs. And I still think other prepaid tuition plans should do the same.

As an added note:

Alabama is not the only 529 plan fully open to nonresidents where investment performance is tied to tuition and fee increases. The Colorado Prepaid Tuition Plan offers tuition units indexed to average Colorado public tuition and fees (4% minimum annualized return). And College Savings Bank's CollegeSure(R) CD (available through the Arizona and Montana 529 plans) provides a return each year determined by a national index of private college costs (4% minimum). The index for the year ended July 31, 2001 rose by 5.2%.

» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
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