Saving Up for College Tuition and Hedging, Part 4

Are prepaid tuition programs a great investment? One is right to be skeptical. The programs vary considerably from state to state. Bankrate.com has an article about some of the programs. It turns out that one can be paying anything from 41% to a slight discount to current tuition. Two states, Pennsylvania and Texas offer programs which do not ask for a premium as long as you use the tuition vouchers for state schools. In the Texas case, you receive fund performance if you elect to go to a non-state school. Virginia's program appears to be offering tomorrow's tuition at a slight discount even compared to today's tuition rates if one goes to the most expensive state school. Otherwise, you would be paying a premium. For most of the state programs, tuition inflation will have to accelerate considerably for the programs to be worthwhile. Still, though purchasers of prepaid tuition vouchers pay a premium, the states are still on the hook if tuition inflation does get out of hand.

State	Minimum Break-even Tuition Inflation
IL	3.9%
MD	5.0%
MI	9.0%
MS	1.1%
NV	6.4%
TN	4.3%
WA	7.4%

As you can see from the above table, for most of the states, the break-even tuition inflation rate is quite reachable, given historical tuition inflation rates. However, past performance does not guarantee future returns. Tuition inflation may decline, in which case one can easily lose quite a bit of money on these instruments.