This article was originally posted on September 7, 2021. It was updated on January 10, 2023.
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Introduction to Prepaid Tuition Plans
Saving for your child’s college education is one of the most daunting financial hurdles you will face. College costs have gotten out of control and continue to rise year after year.
As a direct response to this financial challenge, a handful of states created prepaid tuition plans.
Note: Most of these plans are included under the category of Section 529 plans, but in general, when people refer to 529 plans, they are referring to the savings variety and not the prepaid variety.
Ironically, the reason many states created these plans is also the reason for their demise. Currently, only nine states enroll new members in their prepaid tuition plans.
Prepaid plans vary from state to state, but in general, you buy credit hours for your child at current prices that can then be used at a qualifying school in the future. In doing this, you can theoretically hedge against inflation and the risks of a market downturn.
Today, we will look at the Texas Tuition Promise Fund, which replaced the Texas Guaranteed Tuition Plan in 2008 and seeks to provide a more convenient and affordable way for parents to cover future tuition and fees.
Are We Eligible for the Texas Tuition Promise Fund?
Currently, any child enrolled in the program must be a resident of Texas, OR the parent purchasing the credit hours must reside in Texas. If you fit one of these two criteria, you are eligible to enroll in the program.
The open enrollment period for the program is from September 1 through February 28. Enrollment for children younger than one year of age extends through July 31.
What Does the Texas Tuition Promise Fund Cover, and Which Colleges Participate?
Per their website, “The Texas Tuition Promise Fund® allows you to lock in current undergraduate tuition rates and schoolwide required fees at Texas public colleges and universities, excluding medical and dental institutions. Tuition units purchased in the plan may be used for all or a portion of these costs, and our flexible payment options fit almost any budget.”
Note that this program is not available for graduate students. You may, however, rollover funds from the prepaid plan to a 529 savings plan.
Similar to a 529 Savings Plan, qualified withdrawals to pay for tuition also come out tax-free. The credits, however, are only to be used for college tuition. Common items not covered are room and board, books, lab fees, and additional miscellaneous fees like class fees or transportation costs.
Currently, all Texas public universities, whether four-year or two-year institutions, must accept the tuition credits purchased within the program. The one exception, as mentioned above, pertains to medical and dental institutions.
What Types of Tuition Credit Units are Available, and How Do They Differ?
There are three types of tuition credits available. They provide tuition coverage on a tier-based system:
- Type 1, the most expensive, will cover your tuition cost dollar-for-dollar at any public Texas university or college.
- Type 2, less expensive than type 1, will cover tuition up to the weighted average cost of all Texas public universities and colleges. This means that if the school your child will be attending costs more than the state average, you will have to cover the difference. However, should your child’s tuition be at or below the weighted average, 100% of the tuition would be covered using the credits.
- Type 3, the least expensive credit, works the same way as Type 2. However, it is only meant to be used for two-year Texas public universities and colleges.
What Happens If My Child Goes to a Private or Out-of-State College?
You can still use your prepaid tuition credits to pay for your kid’s education at eligible institutions, but they will be counted at the “Transfer Value” of the units as established by the fund. As defined by the Texas Tuition Promise Fund, the “Transfer Value” is whichever of the following is lower:
- The costs the tuition units would pay at a public in-state university/college
- The original purchase price of the tuition unit plus or minus the plan’s net investment earnings or losses on that amount
What Do We Do If We Don’t Need the Tuition Credits Anymore?
Perhaps your child decides to go to a cheaper school than expected. Maybe they don’t go to college at all. Or maybe, they receive a large scholarship.
You have three options for these scenarios:
- Refund of Credit Hours
To be eligible for a refund, the tuition units must have met the three-year holding period requirement. If they have not met the requirement, you are only eligible for a “reduced value refund.” A reduced value refund is the lesser of either the price you originally paid for the unit(s) OR the original price you paid MINUS net investment earnings or losses on that amount.
If you do meet the three-year requirement, the earnings your credit hours have accrued are still not guaranteed to be refunded back to you and are determined based on the ‘actuarial soundness,’ or the financial health, of the fund.
Lastly, any earnings that are refunded are taxed as ordinary income and come with a 10% penalty.
- Transfer the Account to Another Eligible Beneficiary
The account can be moved to another eligible beneficiary. There are two qualifications that the new beneficiary must meet:
First, the new beneficiary must be a family member of the current beneficiary. Second, the child enrolled in the program must be a resident of Texas, or the parent purchasing the credit hours must reside in Texas.
- Rollover the Funds into a 529 College Savings Plan
The third option involves rolling the transfer value into a 529 college savings plan. These plans allow you to use the funds for qualified higher education expenses without paying a 10% penalty on withdrawals or ordinary income tax on the gains.
529 Savings Plans have a broader list of expenses that count as qualified higher education expenses, like room & board, books, lab fees, and even student loans, to name a few.
Is the Texas Tuition Promise Fund Right for Us?
As with every big life decision, you must weigh the pros and cons. How do they align with your unique family situation?
Advantages of the Texas Tuition Promise Fund:
- Qualified withdrawals are tax-free when used to pay tuition and required fees
- Potential savings down the line by purchasing credits at today’s prices
- Convenience and peace of mind
- Benefits are transferrable to another eligible beneficiary
- The plan is still valid if you move out of state
- Not counted as an asset in the state financial aid calculation
- Potential scholarship matching opportunities
- You can always rollover to a traditional 529 Savings Plan if need be
Drawbacks of the Texas Tuition Promise Fund:
- Not as much flexibility as a 529 Savings Plan (e.g., cannot be used for room & board or student loans)
- If your student doesn’t go to a Texas public college, you’re not getting as good of a value.
- Unlike some other state plans like Florida’s, this one is not guaranteed by the full faith and credit of the state. Texas law does, however, require all its public colleges to accept tuition credits as payment.
- You may have better investment options elsewhere.
This program can be a great fit, but maximizing its value depends on whether your child ends up going to a Texas public school. Perhaps you’ve considered having both a prepaid tuition plan AND a 529 savings plan to get the best of both. It may help to talk to a college funding expert who can help you identify fitting solutions for your unique family circumstances.
The College Funding Coach in your area is always willing to help you find the right financial path to college. The sooner you start, the more affordable a college education can be.
Author:
The College Funding Coach
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For more information:
The Texas Tuition Promise Fund Website
Texas Tuition Promise Fund FAQ Sheet
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