Shut Out of a Prepaid Plan

I'm interested in investing in Ohio's prepaid tuition plan for my daughter but remember that the plan closed a few years ago. Are there any plans to open it back up?

Ohio's prepaid tuition plan remains closed to new investments and has no immediate plans to reopen, but the Ohio Tuition Trust Authority reassesses the plan's financial situation every year. People who have already invested in the plan can keep their money there, however, and it's a good idea for them to hold on tight. Average tuition for Ohio's four-year public colleges has been increasing by about 14% per year since the state lifted its annual 6% tuition-increase cap in 2000.

Ohio isn't the only state with rising tuition rates. Across the United States, the average tuition for four-year public colleges has increased by at least 7% every year since 2001 -- peaking at a nationwide average of 13% in 2003.

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Meanwhile, interest rates dwindled and the stock market wobbled, and the plans themselves had a tough time investing their money to keep up with their soaring obligations -- a lot like the trouble many pension plans have had. Because many states guarantee that they'll make up any shortfall between their plans' actual investments and the tuition amounts they have promised families, several shut their doors to new investments.

Colorado, Texas and West Virginia closed their plans to new investments in 2002 or 2003 and remain closed. Meanwhile, many other states started charging investors a 5% to 20% premium on top of the current tuition rate to buy the plan.

If your child is just a few years away from college, the tuition may not increase enough in that short time to make up for the extra charge you've paid. In that case, you might do better investing short-term money in a fixed account within a 529 college savings plan. And even if you have a long timeframe ahead of you, it's generally good to complement your prepaid tuition plan by also investing some money in a 529 account, where you can invest some of the money in stock funds for the long haul.

Also check out the state's guarantees. Many guarantee that they will cover the full tuition as promised, even if the plan has an investing shortfall. But some others have more flexibility to make changes to your contract after you've already invested your money.

There may be better news in the future, though. Nationwide, average tuition increases for four-year public colleges started to slow down a bit last year -- rising by 7% in 2005, which is a lot more reasonable than the 13% in 2003. If these tuition rate increases continue to slow, some of the states may reopen their doors to prepaid tuition plans.

For more information about prepaid tuition plans and 529 plans, see our Find the Best 529 Plan map.