Many times when we meet with clients, the topic of how to pay for their children’s college is on the forefront. There are really two main choices when deciding on a college education fund in Texas, a traditional qualified 529 savings plan or the Texas Tuition Promise Fund.
Texas has a traditional qualified 529 savings plan which is managed by a third party and offers a broad range of investment options from which you can choose. The 529 savings plan offers tax-free growth of your investment, and tax-free withdrawals when used for qualified higher education expenses. It’s important to note that when selecting a 529 savings plan, investors are not restricted to using the plan offered in their state. This means you are free to use any states’ 529 plan that you prefer.
While the 529 savings plan has its own benefits and drawbacks, I want to take a deeper dive into the alternative to a 529 savings plan, the Texas Tuition Promise Fund.
What is the Texas Tuition Promise Fund?
The Texas Tuition Promise Fund is a Texas prepaid 529 plan that allows Texans to lock in tomorrow’s Texas public tuition and required fees at today’s prices. With tuition costs rising at a conservative estimate of 6% annually, this could offer a huge savings to those of you with younger children or grandchildren.
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To put this annual increase percentage in perspective, a four year Texas college tuition that currently costs an average of $26,120 over a four year period will cost $46,776 ten years from now. Run that same 6% annual increase over an 18 year period for a new born child, and… well, you get my point. With costs rising so rapidly, how can you possibly afford to help send your child or grandchild to college? Texas Tuition Promise Fund may be the answer.
This plan is administered by the State of Texas and allows you to purchase “tuition units”, which represent a fixed amount of undergraduate resident tuition and required fees charged by Texas public colleges and universities. The number of units needed varies depending on the school, but generally 100 units represents 30 semester hours, which is considered to be one academic year.
How does the Texas Tuition Promise Fund work?
So how many units will you need and how much will they cost? That’s a good question, and the official website offers a great calculator to help you build your plan. There are three different types of units which represent 2-year colleges, 4-year public school weighted average cost, and finally 4-year large schools with the highest costs.
Each of the three “unit types” has a different price and is designed to fit different budgets. The key here is that all units can be used for any Texas public college in the future. For example, if you own Type III units (lower cost) it will most likely take more than 100 units per year if attending a Type I or Type II college or university.
The opposite also holds true, if you own Type I units (higher priced) you would need less than 100 units per year if attending a Type II or Type III college or university. The choice of what “unit type” to purchase ultimately comes down to your budget, and the future college choice down the road.
This Texas Tuition Promise Plan offers Texans the ability to prepay for their child or grandchild’s college in today’s dollars, versus an inflated cost later on down the road. There are many details including the flexibility of the plan, the ability to change beneficiaries, how to get a refund if your child doesn’t attend college and many other questions that should be answered by a qualified financial planning professional prior to getting started.
