When prepaid college plans work

This reader story comes from Elaina. Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income.

Recently in the news I have heard more and more about the pros and cons of prepaid college plans (here, here). This type of plan allows an adult to purchase tuition for a minor and lock in the current rate, often at specific universities (e.g., in-state, public institutions). While sometimes controversial, the purchase of two prepaid college plans was likely the best investment decision my parents ever made.

My parents purchased the Michigan Education Trust (MET) for my brother and me in 1987. At the time, it cost them $7,000/child to buy 120 credits (~$58/credit). By the time I started my freshman year at my chosen in-state school in 2002, each credit cost $179.75. When my brother started at the same school three years later (and I was a senior), credits were up to $223.50. In 2011, I returned to finish a second B.A., with each credit costing $353.25. By the time we were beginning (or in) college, this seemed like an obvious investment. Looking back, buying your children college tuition at ages zero and three seems incredibly risky. Through some thoughtful and deliberate actions, our parents were able to make this investment incredibly successful. How did they do it?

1. Clear Expectations

Parental encouragement to attend college has always been a significant factor (Hossler, Braxton, and Coopersmith, 1989). For as long as I can remember, my parents asked my brother and me, “Where do you want to go to college?” This began early enough that it was an unquestioned expectation. It was documented in our “school days” books along with school pictures, friends, and interests from kindergarten through senior year. In our household; however, the question “where do you want to go to college?” was coupled with the clear understanding that our college was paid for if we went to a public university in Michigan. My parents were open to the idea that we could look into private or out-of-state schools; but, if we did that, we could not expect them to fund 100% of our tuition.

2. Frequent Exposure

As we were growing up, our parents exposed us frequently to different public universities. We went to camps, athletic events, and shows at Western Michigan University and Michigan State University. We attended Big 10 football and basketball games at the University of Michigan and Michigan State and sports camps at Ferris State, Central Michigan, and Grand Valley State. Starting in high school, we visited each and every public university in the state for a campus visit (with the exception of the Upper Peninsula). The rationale was to help us to be familiar with the campuses whether or not we decided to attend.

3. Supporting the Alternative

I knew which state university I wanted to attend on the day I began high school. My brother, on the other hand, explored both private and out-of-state schools. My parents were still supportive (obviously going to college was the main goal) but were very clear that, while MET would cover all in-state tuition, it would cover only a percentage at these other schools. In the end, he chose to attend the same university as I, although our experiences were very different. It is worth mentioning that we grew up in a small town where going to a large, in-state university was still a pretty big deal. My cousins, on the other hand, went to a larger high school where going to a private or out-of-state school was considered more prestigious.

Overall, the original $14,000 total investment equated to three bachelor's degrees. We were fortunate to attend the college of our choice without the cost of the university or the burden of loans as a factor. I went on to get a Master's degree at a small, cheaper, in-state school. My brother is currently finishing up a Ph.D in a STEM field. Our parents' investment has paid handsomely over the course of the last 27 years (and made us very grateful). Although prepaid plans will likely always be considered somewhat of gamble, they could not have worked out better for our family.

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FI Pilgrim
FI Pilgrim
6 years ago

That’s a great story, and I think there are a lot of people who would benefit from saving for their kids’ college MUCH earlier.

From someone who didn’t attend a formal college (on purpose, since I was working and learning about computers and technology) I worry about putting pressure on my own kids to go, since there are so many alternatives out there now, and college is getting more and more expensive. What will the costs be in 13-15 years when they are ready to attend?

Brian @ Debt Discipline
Brian @ Debt Discipline
6 years ago

That’s some huge savings! I think the only risk is if your child would like to attend another school, but defiantly something I will look into.

Matt YLBody
Matt YLBody
6 years ago

What about the 529 plan?

Elaina
Elaina
6 years ago
Reply to  Matt YLBody

Hi Matt,

We actually also had 529 plans. They definitely have a place, particularly since people are more transient now (our parents both retired from the same place they were working when they bought said prepaid plans). It really depends on what is best for your family.

phoenix1920
phoenix1920
6 years ago
Reply to  Matt YLBody

My biggest complaint about a 529 plan is that there is not enough time to invest and it is completely reliant on the market. I think generally, the advice is to more your savings to low risk investments about 5 years before you need them. But imagine if you had a child starting college a year prior to when the DOW Jones plunged, dropping from 14000 to about 7000. While it recovered, it took about 4 years–the time your child would finished with college. We need a program where people can have more of a guaranteed ROI–which means the investor… Read more »

Beth
Beth
6 years ago

Interesting story! We don’t have anything comparable in Canada, so I had to look up to see how it works. Correct me if I’m wrong, but essentially someone else invests your kids’ education savings for you (instead of you managing your own 529 plan).

Kudos to Elaina’s parents for thinking ahead, but sadly a lot has happened since the 1980s. I noticed that many of these plans are facing shortfalls and some have even closed to new investors. I think it’s an interesting option but do your research and read the fine print.

Laura
Laura
6 years ago

Love your story and the great outcomes for both you and your brother! However, I feel the need to add a cautionary note. In my state, the plan similar to the Michigan plan is no longer accepting enrollment, and has been closed for several years. The bad years of the economy meant that the plan underperformed when compared with state tuition increases, and the state acted to cap amounts payable to 2011 tuition levels, I believe. As a result, a lot of parents who thought they were paying for an entire college education in state now have to scramble to… Read more »

Elaina
Elaina
6 years ago
Reply to  Laura

Hi Laura,

Excellent point. I know MET is still available, although obviously much more expensive at this time! Thank you for your comment.

Theresa
Theresa
6 years ago

Our prepaid college plan in Washington state allows you to to use your money in any accredited college, in or out of state. It’s fantastic. Our son is 16. We bought in when he was 4 years old. It’s amazing how much tuition has gone us since he was 4! However, as another person noted, these plans are not quite as good a deal as they used to be. They are a little more expensive now due to them underperforming in the lean years.

Emily @ evolvingPF
Emily @ evolvingPF
6 years ago

I think if my parents had participated in this kind of program in our state and prepared me the way yours did I would have accepted attending our state’s flagship university. Because they always told me I could go whereever I wanted, though, (kind of an ‘aim high’ mentality) by the time I was applying for colleges I was pretty set on not going to that university. Over 1/3 of my graduating class went there, and I wanted to try something new and go out of state for college. Ultimately I ended up at a school that was better suited… Read more »

mike
mike
6 years ago

As others have noted many of these plans can not meet their commitments due to the #1 problem unrestrained costs. Throwing money at a problem doesn’t make it go away. The colleges never had the incentive to be held accountable. Many have made 30 year commitments now and 100s of millions in loans for fancy facilities and athletic expenses while actual education has suffered and quality standards are not being meet. The focus should be on quality outcomes at a reasonable cost not paying for ancillary expenditures

IL JimP
IL JimP
6 years ago
Reply to  mike

Actually the biggest reason costs at public colleges have gone up so fast is that we as a society have stopped investing in them.

They used to receive much more from state and local governments but in a drive to continually cut taxes we just don’t have that money anymore in our governments. So, the costs just get passed onto the kids going to school which is going to hurt us big time down the road.

Joe M
Joe M
6 years ago

When did the University of Michigan stop being prestigious?

Laraba
Laraba
6 years ago
Reply to  Joe M

U of M IS prestigious, but … I think this is true of many research universities — many profs have an incentive to place research and committee work over teaching. I got my PhD from U of M in engineering. The facilities were amazing and I mostly got good teaching (though there were exceptions) but I wondered about the undergrad education. Many classes were taught by graduate student teaching assistants. I WAS a grad student TA and while I think I did an Ok job, I didn’t have any training at all. There were also MANY foreign grad students, exemplary… Read more »

Laraba
Laraba
6 years ago

First of all, let me say I am very glad it worked well for you. My parents also had an expectation that their 3 children would go to college. There was no other option discussed. Due to various life decisions and circumstances, they struggled financially and had no college savings when it was time for me (the eldest) to go. By the grace of God, I got a full ride scholarship to an in state school, which I gratefully accepted. I then went to another state school and got my PhD in engineering on fellowships and assistantships. My next brother… Read more »

Elaina
Elaina
6 years ago
Reply to  Laraba

Thanks Laraba,

I appreciate your insight. Again, it worked well for us, but may not be for everyone.

Elissa @ 20s Finances
Elissa @ 20s Finances
6 years ago

Super glad it worked! College is so challenging to pay for sometimes – I am still trying to figure it all out.

S
S
6 years ago

It’s important to note that some of the prepaid state run plans are only a good deal if you buy in early enough. The WA state GET program is a good example and needs 6 years to break even.

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