Paying for Future Tuition
The Texas Tomorrow Fund permits parents to buy a credit at today's price taking the average of Texas State Universities, and save it for the future use of their child. On average Texas Universities increase tuition about 7% a year, therefore each credit increases yearly its value by that same amount as well. The recipient has up to 10 years after entering college to use the credits. If the credits are not used, it is possible to cancel, but with a 164 dollar penalty fee, plus 10% of gains would be deducted for taxes. My parents bought me 64 credits in 1995 paying a total of 4,876 dollars. Last year I was a junior and accessed 32 of those credits, which equaled 3,400 dollars.
This year I questioned doing the same, as a senior, for a couple of reasons. If I were to access the 32 remaining credits in my Texas Tomorrow Fund, Boston University would receive about 3,638 dollars, which would be today's Texas’ going rate for 32 credits. This year, my tuition is completely covered by grants and loans, and I do not live in university housing, rather I pay rent directly out of my pocket. By using my remaining credits now, I run the risk of Boston University’s Financial Aid doing one of three things. The best option would be for them to accredit it to my account so I could withdraw it and have it as cash today. The second option would be for them to lower my current loans, even though I am not being charged interest yet. And the third and worse option would be for that money to be used to lower my grants.
I then computed what would happen if I leave the credits in the fund and assume Texas’ tuition continues to increase, but at the more conservative rate of 5%. The expiration of the fund would be in 2009 (since I started college in 1999), which is 7 years from now. 3,638(1+.05)(to the seventh power) = $5,119 minus the 164 penalty fee = $4,955 minus the 10% of gains = 4,955 - [(4,955 - 2,438) 0.1] = 4,955 - 251.7 = $4,703.29
In conclusion, the best choice for me is to leave the credits in the fund because it is a sure way of them increasing in value rather risking my financial aid award being changed. Plus, if I decide to use the cancellation of the funds toward the repayment of my student loans, I would definitely be able to pay back more later. Exactly when would be best to cancel depends on the interest of the loans and the increase of Texas' tuition.