NCPA - National Center for Policy Analysis

Enrollments in Prepaid Tuition Plans Is Surging

November 6, 2001

Twenty states now allow families to lock in today's college tuition rates by paying a lump sum or periodic payments. Administrators of the plans say a combination of stock market losses and escalating college costs have families flocking to sign up.

  • In the first half of the year, about 150,000 families signed up for prepaid accounts -- compared with 105,000 for all of 2000, according to the National Association of State Treasurers.
  • In addition to the 20 states now offering the plans, Maine and New Jersey are in the midst of establishing them and at least two other states are considering them.

Trendier state-sponsored savings plans with a variety of investment choices were all the rage when the stock market was going up. But prepaid plans -- which offer the security of a guarantee that contributions will match tuition inflation -- have gained greatly as the markets have tanked.

  • For example, the mutual funds in Ohio's savings plan posted third-quarter losses ranging from 1.28 percent to 15.17 percent.
  • By contrast, families in the state's prepaid plan are in effect getting a 6.4 percent annual return -- since that has been the rate of tuition inflation over the past decade.

Many people assume that their children are locked into attending a specific state university when they sign up. But that is not usually the case. Most plans allow funds to be used for any school.

Source: Christine Dugas, "Market Woes Boost Prepaid Tuition Plans," USA Today, November 6, 2001.

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