Should you invest in a prepaid tuition plan?

Federal tax law changes have increased the popularity of "qualified state tuition plans" -- popularly called prepaid tuition plans -- for college education. Do these plans make sense for every family planning to send its children off to college? Not always, say many financial planners.

While the plans vary in details, in general, the family pays into the state program a set amount of money based on the age of the child. For a newborn, the family might pay $6,200 for four years; if the child is five, $9,300. Payments either are in a lump sum or installments. The state invests the money and guarantees that four-year tuition costs will be paid for at any state public institution, regardless of how much tuition rates may rise by enrollment time.

Most state prepaid tuition programs allow the transfer of the principal the family pays in, plus earnings (equal to the rise in average tuition costs) should the child decide to go to a private or an out-of-state public school. Some programs permit the funds to be transferred to benefit another child in the same family. The programs also allow refunds, sometimes with or without earnings, in the event he or she doesn't go to college or the parent or child dies before the latter enters school.

Should families take advantage of these prepayment programs? The Institute of Certified Financial Planners, Denver, Colo., suggests keeping the following points in mind when deciding:

Disciplined investors probably can do better on their own. The return on prepayment programs basically is the inflation rate of tuition, which has been running about six-eight percent at public schools. Alternative investments such as stocks, mutual funds, or other more aggressive instruments typically do better than that over time, On the other hand, the tax deferral benefits and the taxing of the earnings at the student's rate...