Seventeen states have enacted such programs and 30 more are considering them. The idea is to allow parents to lock in public university tuition credits at today's prices as a hedge against college costs that outpace inflation. When the child enrolls in college, the credits are redeemed to pay tuition. State and local taxes are deferred upon deposit and assessed at redemption in the child's bracket. There are usually penalties for cancellation, if a student should decide not to attend college.
Prepaid tuition is a guarantee.
That's the good news. The bad news is that such programs are extremely conservative investments, especially when the stock market is going like gangbusters. Most investors can do better there, tax benefits or no. Furthermore, college tuition increases have moderated to the 5-6 percent range and may fall even lower. With the addition of new federal tax breaks, prepayment is looking less attractive than two or three years ago, when the programs were conceived.