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Ask Dave

Is Prepaying For College Wise?

Tim receives two major reasons from Dave as to why he shouldn't prepay his child's college education.

QUESTION: Tim asks Dave if prepaying for his child’s college education is wise.

ANSWER:  You should not prepay for college for two major reasons. 

The first problem is that the states who are participating are not managing these accounts very well and are going to have trouble honoring the prepayment agreements. 

The second problem is that when you prepay for college your rate of return is only about 7% - 9%, which is the rate of inflation on college tuition.  Instead you should invest in good growth stock mutual funds in an Educational Savings Account (ESA) where the rate of return is 12%.