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Higher education has gotten very expensive and maybe unaffordable to many families. Parents should realistically look at higher education costs, and determine whether or not they can afford to pay for 100% of their child’s education. If you have more than one child, it might be a bitter pill to swallow if you determine that you cannot afford to pay for all of your children’s college expenses. You may want to consider funding less than 100% of the costs.
Current estimates to send your child to the University of Texas-Austin and live on campus are $22,464 to $27,168 per year, see UT Costs . Over the past decade, public college costs have risen about 6.9%. If your child starts today and takes 5 years to graduate, it could cost over $155,000 for their education.
Unless you are a multi-millionaire, $155,000 is a significant portion of your wealth. And if you have more than one child that you want to put through college well…do the math.
In order to help put Texas residents through college, Texas has several college savings plans, aka Section 529 plans. Here are some characteristics of 529 plans.
1) Contributions to 529 plans are from post-tax funds. There is no tax-deferral characteristic with regard to the money used to fund the account.
2) Once money is inside the fund, the earnings grow tax free. When withdrawals are made, if the funds are used for tuition and required fees, then there is no tax on the earnings. However, if you not use the withdrawal for eligible expenses, there is a 10% penalty on the earnings.
3) One person owns the account, and there is one account beneficiary.
4) The first one that I would like to discuss is the Texas Tuition Promise Fund. You should know that the money you contribute to this plan is not FDIC insured. Although the State works with the plan managers, no government agency, either state or federal, insures or guarantees that you will not lose money. See “Plan Detail” in TTPF
The following discussion only pertains to Texas residents who are undergraduates attending public universities.
The fund is a prepaid tuition plan, meaning that you pay for college tuition before your child starts college. Also, it locks in the tuition and fees costs at today’s rates. Remember, over the past decade college costs have risen by about 6.9% per year. So, freezing costs is a very important feature of the plan. Also note that it actually pays for tuition and required fees, but not room and board or books. Here is how it works.
College costs (tuition & fees) are represented by Tuition Units, rather than dollars. It starts to get a little complicated after this. As you may or may not know, tuition and fees are not the same at every Texas college. For example, the tuition and fees at UT-Dallas are more than the tuition and fees at Sul Ross State University-Rio Grande, by almost two and a half times. Not only that, but for many universities the tuition and fees vary from major to major. To address this diversity, the plan creates types of Tuition Units.
What is a Tuition Unit?
The first type is simply called Type 1. 100 Type 1 units will pay for 30 semester hours, or 1 academic year at Texas’s most expensive colleges. Today’s cost for a Type 1 unit is $107.44 per unit. So, 1 academic year will cost you 100 units times $107.44 per unit = $10,744. If you want to pay for 5 years of college, the cost is 5 time $10,744 = $53,720.
This seems like a pretty good deal. After all, today at UT-Austin tuition and fees range from $17,040 to $19,616 per academic year (UT Costs). One reason for the discount is that you cannot use a tuition unit for at least 3 years after purchase.
The second type of units is obviously Type 2; today’s cost for a Type 2 unit is $75.47. Instead of using Texas’ most expensive colleges as a reference, the value of Type 2 units is based on a weighted average cost of tuition and fees at 4 year public Texas colleges. If the tuition and fees at your chosen college are less than the weighted average, then 100 Type 2 units will fully cover one academic year at the college. However, if the tuition and fees are greater than the weighted average, 100 Type 2 units will not cover all of the related expenses.
The last class of units is Type 3. Like the Type 2 units, its value is based on a weighted average of tuition and fees. However, the tuition and fees are for 2-year Texas colleges, not 4 year. As expected, the cost of a Type 3 unit is significantly less than the other two units. Today, the cost of a Type 3 unit is $18.51. Again, if the tuition and fees of your selected 2-year college are more than the weighted average, 100 Type 3 units will not cover all of the college expenses.
How Do You Pay for the Plan?
There are three ways to pay; the first is a lump sum. You could buy 500 Type 1 units, and make a one-time payment of $53,720. The second option is to setup an installment plan. In this scenario, monthly payments are due for either a 5 or 10 year term. If you choose this option, the finance charge is about 8%. The third option is referred to as “Pay-As-You-Go”. Here you can purchase from 1 to the equivalent of 600 Type 1 tuition units.
In summary, I’ve tried to highlight some important features of the plan. There are many other plan characteristics that you should be aware of before making a decision as to whether or not participate in the plan. Brycast will be happy to review the plan with you.
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