Important Author’s note: While this discussion focuses on the Texas prepaid-tuition plan, many states offer similar programs with comparable features. The decision-making process can often remain similar depending on where you live. If you would like us to review your state’s prepaid plan in a future video or article, please reach out and let us know. Now, let’s dive into the details.
When you become a parent, two things happen almost immediately:
- You stop sleeping well.
- You start thinking about college for your newborn, at least if you’re a financial planner!
This article is based on a recent video discussion with Kevin Gormley, CFP®, CPA, and me, in which we explore the benefits and limitations of both 529 plans and the Texas Tuition Promise Fund. (If you prefer to watch instead of reading, check it out here: Leading Edge Financial Planning – YouTube)
Why Start Now?
College planning is similar to retirement planning in that the best time to start is now. Tuition costs have historically risen faster than almost any other expense, so waiting can be costly. Whether you choose a 529 plan, a prepaid tuition plan, or both, the most important step is to start saving as soon as you can.
Texas Prepaid Tuition Plan: How It Works
The Texas Tuition Promise Fund lets you lock in today’s tuition rates for future college costs. Essentially, you’re buying tuition units now that can be redeemed later, regardless of how much tuition increases.
Pros
- Locks in current tuition rates: Great if college costs keep rising.
- Minimal market risk: Your money isn’t invested, so it won’t fluctuate with the stock market.
- Predictable: You know what you’re paying for tuition.
Cons
- It covers tuition and fees only: Room, board, books, and other expenses are not included, which can sometimes be as much as tuition and fees if not more.
- Limited flexibility: Designed for Texas colleges. If your child goes out of state, you’ll get an equivalent dollar amount, but it may not cover full costs. If your child doesn’t need the funds for tuition—for reasons like receiving a full scholarship, joining the military, or choosing not to attend college—you have several options, including:
- Transfer the plan to another eligible family member.
- Roll over the balance into a 529 plan for future education expenses.
- Request a refund, subject to taxes and potential penalties on earnings.
- Complexity: You purchase tuition units, which are categorized into different types (Type 1, Type 2, Type 3) based on the school level.
- Type 1: Most expensive, covers flagship universities.
- Type 2: Average cost of Texas public schools.
- Type 3: Community college level.
If you’re interested in learning more, visit texastuitionpromisefund.com.
The site offers a calculator to help you estimate costs based on your child’s age, unit type, and payment plan.
529 Savings Plan: How It Works
A 529 plan is sort of like a Roth IRA for college savings in that you contribute after-tax dollars, the money grows tax-free, and withdrawals for qualified education expenses are tax-free. However, unlike a Roth IRA, a 529 plan is specifically designed for education. If it is not used for education, gains in the 529 are taxable and include a 10% penalty when removed.
Pros
- Flexibility: Can be used to cover tuition, fees, room and board, books, and more.
- Investment growth: Your money is invested, so it can grow over time.
- Can be used nationwide: Not limited to state, (in our example here, Texas schools).
- “Escape Hatch”: There are multiple ways to get monies out of 529’s that have been updated in the last few years with new legislation, including moving it to a Roth IRA for your child if certain conditions are met.
Cons
- Market risk: Investment returns are not guaranteed and can vary. Most 529 plans use age-based portfolios that start aggressive (stocks) and gradually become conservative as your child approaches college age.
- No guaranteed tuition rate: If tuition skyrockets, you’ll need strong investment returns to keep up (or more cash/loans to make up the difference).
Cost Example: Texas A&M
(Data Source: Peterson’s Undergraduate and Graduate Institution Databases, copyright 2025. Peterson’s, LLC. All rights reserved)
Here’s a scenario that demonstrates why planning matters:
- Texas A&M estimated annual cost in-state: ~$26,000
- Tuition & fees: $12,400 (covered by prepaid plan)
- Room, board, books: $13,600 (not covered by prepaid plan)
In this example, if you use the prepaid tuition plan, you will still need a strategy for the other half of college costs—this is where a 529 plan could come into play.
Can You Use Both?
Absolutely. Sometimes our minds gravitate to a one-size-fits-all solution, when in reality, we can use both to optimize college savings. A few examples of using both plans to hedge your risks include:
- Prepaid plans can protect you if tuition keeps rising.
- 529 plans provide flexibility and cover non-tuition expenses. It is also a hedge in case college tuition does not continue to increase at such high rates. In this case, it could become more attractive than the prepaid plan.
Together, they have the potential to reduce the risk of being underfunded.
Getting Started
- 529 Plan: It is a fairly easy process to open a 529 account in your state (or any state.) Some states even offer tax deductions for contributions.
- Texas Prepaid Plan: Go to texastuitionpromisefund.com, review unit types, and determine how much to purchase based on your goals.
Bottom Line
College isn’t cheap, and costs continue to rise. Whether you choose a 529 plan, a prepaid-tuition plan, or a combination, the most important step is simply to start. The sooner you begin, the more flexibility and peace of mind you will have when your child heads to college.
In our experience, families who plan ahead, whether through a prepaid plan, a 529, or both, rarely regret it. What matters most is having a strategy in place and sticking to it.
I leave you with two quotes from personal-finance expert, Morgan Housel. He explains in his book, The Psychology of Money, that sometimes sticking to a simple strategy is more effective than endlessly searching for the perfect one. Don’t get bogged down by details; focus on saving and spending less than you earn.
- “My own theory is that, in the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes how well they sleep at night.”
- “The reasonable investors who love their technically imperfect strategies have an edge, because they’re more likely to stick with those strategies.
Please tell us if we can help you on your journey to financial peace and prosperity! Hopefully, you found this article interesting and helpful. If you have any questions, contact us at 865-240-2292 or Nolan@leadingedgeplanning.com. Check out our Pilot Money Guys podcast where we regularly discuss these types of financial topics along with some fun airline news updates and interesting guest interviews. Even the editor and founder of Aero Crew News – Craig Pieper!
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