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For more information on how you can become a patron and for more information on all the benefits of doing so, please go to radicalpersonalfinance.com/patron. Today on the show, we continue our 529 Plan Masterclass with a bit of a deep dive into the idea of the prepaid tuition contract. I live in Florida.

These types of contracts are incredibly popular in my state. And I'll tell you why I do not plan to buy one for my children. Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets, and today is Wednesday, February 25, 2015. Today, we continue our process of going through the college plans, and we get to the, in some states much loved and in other states much hated, prepaid tuition programs.

I think they're pretty much a waste of time, but I'll defend that opinion today. Not only will I actually defend that opinion, but I'll, as always, give you the other side of the argument. I'll tell you the places that I do think these plans are useful and how I can see them being of benefit for you.

So that's what you can expect for today. Trying to round out this 529 Plan, at the moment, we're going to do this today on prepaid tuition programs. I'm going to cover one additional topic. I'm going to do probably an entire show, I think, on the independent 529 Plan because this is an interesting option for those of you who are very committed to name-brand prestigious universities.

And so I'll probably just do that as an entire show, but it works similarly to what we're talking about today. And if you haven't heard the background of this series, you will want to go back and listen to the previous shows in this episode. This is the fourth show in this series.

It talked about the basics of 529 Plans. We talked about the savings plans. I guess this is the third show, I think. So check the show notes on today's show, and you'll see links to those other episodes. But today we get to the prepaid tuition programs. To refresh your memory, Section 529 of the IRS Code lays out the ideas for how you can structure a college savings plan in such a way that it will qualify for the tax deferral and for, under current law, a tax-free distribution of money.

Based upon that section of the code, there are two primary plan designs that have been created. The third one, again, is this idea of a prepaid tuition contract for independent private universities, which we'll go over another day. But the two primary plan designs is the idea of a savings plan, which is essentially you put aside a certain amount of money.

It goes into an investment contract, usually mutual funds. And then the money, when it's ready to be used for college, can come out of those mutual funds. The other idea is the idea of a prepaid tuition program. And so the way these plans work is you purchase a series of either tuition credits or – and there are two ways that these are actually organized, and I guess I'll go ahead and give you that.

There's either the prepaid contract or the prepaid unit approach. The prepaid contract is – allows you to purchase a contract that covers anywhere from one to up to five years of tuition. You can pay for it either on a lump sum or an installment basis. And then the prepaid unit approach allows you to buy so-called units of tuition.

And those units of tuition may equate to credits or hours depending on how they're structured. So there's kind of two different ways. Most people aren't familiar with those two different ways. I'll go over the states that offer the two – the different types of plans in just a moment and explain to you which states – it's primarily – in your state, if you have a prepaid approach, it's one of these two approaches.

So there's not a lot of choice. That's why most people don't talk about that little differentiation. But regardless, the way these plans work is you purchase a contract and basically you pay for the tuition that your child is going to need in the future today. And again, you can pay it in a lump sum.

You can pay it in a series of ongoing payments. You can pay it off in three or five years depending on the plan, something like that. But that's how they work in essence. Now, let me give you the sales pitch for why these plans are popular. And their popularity varies greatly depending on the state that they're in.

In my state again in Florida, these are incredibly popular. In fact, to the best of my knowledge, Florida has the most popular, largest prepaid tuition program in the country. And it's very rare. If I come across a client or a prospective client or I'm talking to somebody for whom college savings is a priority and they've taken action of some kind, generally, it's with the Florida prepaid tuition program.

It's extremely popular down here. The reason that it's popular, the primary reason is it allows the parent to purchase what they need and plan to provide for their child without having to face the uncertainty of investment risk. And it is actually quite powerful for that purpose. I want to be very fair and straightforward with my analysis.

The problem as we've discussed in the previous show on savings plans is that if you are actually building a portfolio for your student, you need to manage the variability of that portfolio very carefully as your student approaches the date of distribution for their college expenses. So, this can be quite challenging depending on where we happen to be in the economic cycle.

For example, just think back five – seven years now. Wow, 2008, 2009, if your student was going to college and that was right in a year in which your plan – you were getting ready to pull money out of a plan and you hadn't insulated that portfolio from the market conditions, that could really be a challenge for you to figure out how do you pay for college when the market is down.

When the market is up, you feel like a winner. When the market is down, you feel like, "This is tough." Now, it would be a lot easier if instead of managing a portfolio for you, for your family, for your children, you could just simply have a portfolio that was designated for many students over a long period of time.

And that's in essence what these plans are. There's a portfolio manager who is hired to run the plan and this portfolio manager is responsible to assure that the plan has enough money to pay for all of the students who are enrolled for all of their college expenses. And this is a lot easier to do because the drains on the plan, the outflows from the plan are varied over time.

Additionally, there's always inflows into the plan. As long as the plan is enrolling new students, new parents, then there's inflows of capital and the investment manager can use that capital to make intelligent investments and to run the portfolio well. And so even if the plan is in a deficit in one year, that doesn't mean that it's doomed forever.

And if the plan is doing well, that means it's doing well. And so the benefit for parents in this scenario is quite – actually quite great because you lock in the tuition and you get to avoid the investment risk. That's the benefit. And again, this is very legitimate, very valid.

It helps a lot from the portfolio management perspective because the portfolio can be run much more like, say, an insurance company's portfolio is run where they have liabilities that are spread throughout time. The investment portfolio manager can adjust the portfolio to match the time needs for those liabilities. It's just a much more efficient approach or at least that's the primary way that it's sold.

Now, what's the challenge? Well, the challenge is, A, what if the plan doesn't perform as advertised? And B, what do I get in exchange for it? And so remember when we lock in certainty, we often give up the potential for higher returns. And again, that may be an excellent strategy or it may not.

That's up to you. If these plans are executed well and if in your personal financial planning scenario you're very confident of what the future holds and where your child is going to go to school and exactly what they're going to do and they're going to go to school, and if you are confident that college education is going to continue to march upward at very high rates of inflation, well, then this can be a great plan.

The challenge is that's a lot of ifs. Remember that the original plan, the Michigan Education Trust, which was the plan that was established in Michigan that actually led to the creation of Section 529 in the code, in the IRS code, that that plan was actually a prepaid contract program.

Now, the challenge where these plans really got into trouble was back in 2008 and 2009. That was when you started seeing a lot of news stories and what happened is just many people, many plans were significantly exposed to the equities markets. And because they were significantly exposed to the equities markets, then their plans – their investment returns were impacted just like most people's were.

And so now many of these plans are substantially underfunded. So then the question is, well, who's guaranteeing it? Now, the assumption here is that the states are on the – they're responsible to make sure that the plans are paid for and that in this case you've transferred your risk from you and your family to the state.

That's the assumption. Is that true? That has been true so far but it's not necessarily always true. And this is where you need to look into your specific state and figure out, wait a second. How is my specific state run? And then this is where we get into the problem of just like any government entitlement benefit, well, how confident are we in this?

Then we have to start measuring things like political will. Then we have to start looking at things like, well, is it actually economically feasible? And now we're in a world where it's just such total guesswork to predict the future that we might as well not even try. So if you look at these plans, the majority of these plans are underfunded and there are only a few of them in the states that offer them that are actually fully guaranteed by the state.

And any full guarantee of the state – remember, you're always subject to a change of law. That's the reality. Social Security is fully guaranteed by the government, fully guaranteed by the state, certainly not fiscally sound in any way, shape or form. And can laws be changed? They've been changed many times.

So then you're trying to measure political will and political wins and that's tough. Probably the best example of this was in Texas and the – Texas had established a plan. If you go back and research it, you Texans would probably know a little bit about this. Texas had a plan called the Texas Tomorrow Fund.

But they closed that fund in 2003 and they closed that fund to new enrollment. And yes, it is backed by the full faith and credit of the state of Texas. But they announced a change in policy about how they would reimburse parents who would cancel contracts because their children received scholarship funds or went to a school that was outside of the Texas system.

And so previously, it was promised that they would pay them an amount based upon the current tuition and fees at public universities. But now parents get back what they paid into the fund, only their contributions minus the annual administrative fees. So they changed the rules. The – Texas doesn't have that fund open anymore.

Now they have a new one, however, called the Texas Tuition Promise Fund that opened in 2008. And here in this scenario, the state does not back the plan. Rather, the risk is shifted from the state to the universities in the state. Interesting, huh? Now, I'm not necessarily saying that this is nefarious.

It's probably not. This is how I would probably be running it if I were in the position of responsibility. I'm just saying it's reality. This is what – how things – this is how the situation works. And so the first thing that you need to be aware of if you're interested in a prepaid tuition program is you need to investigate your specific state.

You need to read their annual reports. You need to find out how well it's funded, and I'm going to go over as an example my state in Florida. I read their annual report. I'm going to give you that report, and then I just randomly picked one of the other states and I read their annual report.

And I'm going to give you that actuarial report so that you can have an idea of what to expect when you're involved in the plan. Because you can't just go into this and say, "Well, I'm shifting the risk from me to the state, so therefore it's all guaranteed." Nope, not quite that simple.

You have to remember that there's an investment account backing these contracts for most states. There's an investment account backing these contracts. That investment account is subject to the same market forces that everyone else is. And unfortunately or fortunately, states, unlike the federal government, states do not – have not exercised any right to create their own monetary system.

So the states are fully subject to the monetary system in the country, the US dollar, and states are fully subject to the same investment markets that all the rest of us are in. They don't have any special investment markets. That's unique. Now, the US government, if they have a liability they can't meet, the US government has some control over the monetary system.

They can just simply pay the – they can satisfy the obligation and there's a couple of ways that can happen. So for example, someday we'll get into social security, but it's guaranteed that the US government will pay its obligations. There's a famous quote by Alan Greenspan where he simply says that the United States can always pay any debt that it has because it can always create money to pay the debt.

There's zero probability of default in nominal terms by the US government. States don't enjoy that privilege. Cities don't enjoy that privilege. That's one of the challenges. If a state defaults, it defaults. Now, I'm not trying to get too deep into monetary policy. Just simply this is a reality in these plans.

It's a risk. So let me go through the states and explain to you the states that do have them. There are 13 states that have a prepaid contract plan. Those states are Alabama, Florida, Illinois, Kentucky, Maryland, Massachusetts, Michigan, Mississippi, Nevada, South Carolina, Texas, Virginia, and West Virginia. And then there are five states that have a prepaid plan where you're purchasing a prepaid unit of tuition in that state.

And these five states are Ohio, Pennsylvania, Tennessee, Texas, and Washington. And remember, Texas is the state that's on both lists because they transition from one type to another type. Before we go any farther, I want to clarify. I'm not trying to scare you about the financial viability of these plans.

To date, none of these plans that I'm aware of has not honored its obligations. And I think it's unlikely that these plans won't honor their obligations under normal circumstances. I'm pointing out simply that it's possible that they're not able to honor their obligations. These can be very useful plans if brought in as a component of your overall financial plan.

And the reason is because they're run a little bit differently, because they're backed simply by a guaranteed contract and a promise to pay by an external entity, you're not necessarily subject to the same market forces. So although in the long run, the market forces will make a difference, in the short run, you can use this to smooth out your plans.

Here would be a parallel that probably would be more familiar to most listeners. If you're doing retirement planning, if you have Social Security, you certainly can't know exactly what's going to happen with Social Security over the next 30 years or the next 40 years or the next 50 years.

It's impossible to know. But if you're close enough to that time of retiring, it can help you because you know you have a guaranteed source of income. Is it ultimately risk-free? Of course not. But it's not subject to the same risk that your stock portfolio is, and it's more of a delayed reaction, a delayed risk.

So it's unlikely that this year you're going to be facing a market downturn and Social Security is going to change its rules and we're going to start means testing. We're going to change the ages again or whatever, the so-called fixes, the patches that are going to be done to that system over time.

There's a bunch of things that are going to be done, but they're probably going to come with a little bit more warning than an overnight correction in the stock market. I think rather than trying to predict the future, trying to predict what state is going to run its funds well and which state's not – by the way, I don't trust any of them.

But rather than trying to predict all of that, why don't we just simply look and run some numbers and see if this is a good idea or not? So I am going to use as my example here the state of Florida. Florida, again, has a well-funded plan. I'll go over the actuarial assumptions after I run through these numbers.

But state of Florida has a fully funded plan under their actuarial analysis, fully funded, no shortages. The plan is doing well. It's large. It's much loved. It's got a large continuity of income. It's very popular here in the states. That means there's lots more people that are going to keep signing up in the future.

So that way if the plan runs into short-term trouble, as long as they've got more people signing up in the future, then that helps to save the plan from any problems. Ever notice how this stuff always sounds like Ponzi schemes except they're not? Welcome to social security. That's what social security is based upon.

Anyway, I'm going to move on. My only point is that that's how those plans work. But you don't need to go so deep into the analysis. Let's just look at the numbers. So I'm going to use here – I have a one-year-old son and I live in the state of Florida.

And so therefore I should be saving for his college tuition. Well, let's look and see what my plan would cost me today. So I pulled up the state of Florida, the Florida prepaid plan, and I ran the numbers today. Now, interestingly enough, you should know that in the state of Florida, there was actually a massive, massive decrease in cost last year from previous years, a massive decrease in cost.

And this had to do with some of the legislative changes about how quickly the universities could increase their tuition rates versus before. All during this open enrollment period, which has been going on now over the last few months, all during this open enrollment period, there have been tons and tons of news stories talking about how the cost for a newborn plan in 2015 was – excuse me, in 2014 was $54,000 for a four-year university tuition plan.

A newborn plan was $54,000 and it dropped this year. It's down to $27,000. Or if you were paying monthly, previously the cost for the plan was $350 a month and that dropped down to $173 per month for a newborn plan. So this has been a massive, massive decrease. So let's use these decreased costs and let's run just some quick numbers and try to figure out what the benefit is.

So I ran a plan here under the Florida calculator at MyFloridaPrepaid.com and I put in my son's birthday. My son is a year old and they projected that his year of enrollment in college will be the year 2032. And if you back up from the year 2032 to today, you find that 17 years into the future.

17 years into the future, today if I sign him up for the plan, for the four-year university plan and what this one does, it just simply covers four years of tuition, 120 credit hours at any Florida state university. So there are 12 Florida state universities. It can cover 120 credit hours at any of those schools.

There are cheaper plans. For example, you can purchase the plan that will go for two years at a community college and two years at the state university. There are more expensive plans. You can cover room and board. I just went with straight tuition. And today if I buy this plan for my son, the lump sum payment is $27,379.42.

That's the amount of money that would be due and that's due April 20, 2015. If I want to pay it with monthly payments, I would pay $178.14 per month. If I pay a five-year plan, I would pay $525.17 per month for the next five years and then the plan would be paid off.

Now, I'm going to stick with the lump sum payment because it's a little bit easier to calculate. I'm going to do some simplified math for verbal math. So remember this number, $27,379.42. That's what I need to pay today to get him enrolled into this four-year program. Well, just for fun, I went ahead and decided to see, well, let's go and calculate what the cost of tuition is today at one of the well-known Florida universities.

And there are the two that are the most famous throughout Florida and the country is the University of Florida and Florida State University. These are the two big universities. They have their rivalries and all of that stuff. So I just used University of Florida. It's closer to me. It's in Gainesville.

It's about four hours away versus Florida State which is eight or nine hours away in the car. I'm going to go through what the payments are, what the cost is under this tuition structure, and I'm going to read you actually each of these fees. And this is important because you need to read fine print on everything.

I'll show you in a second why I'm reading these fees. So in the state of Florida, for undergraduate courses which are at the zero to the 4,999 level, that's how the numbers that are things are associated with it, not graduate courses. The cost per credit hour for a Florida resident is $105.07 per credit hour for tuition.

Florida has this weird tuition differential fee thing which to the best of my knowledge is an extra fee that Florida universities have been able to charge because they couldn't increase their tuition rates by a high enough rate. So that's $44.17. So they just add on and somehow legislatively they work this in.

Then there's for every credit hour there's a $6.76 capital improvement trust fund fee. Then there's $5.25 for every credit hour a student financial aid fee. There's a technology fee of $5.25 for every credit hour. There's an activity and service fee of $18.19 for every credit hour, an athletic fee for $1.90 per credit hour, a health fee for $14.93 per credit hour.

And $8.91 for a transportation access fee. So the total Florida resident rate per credit hour is $210.43. Now if we just did the math on that and we multiply $210.43 times 120 credit hours, that equals $25,251.60. That would be our cost today for a four-year worth of tuition. Now remember that's -- I didn't adjust those numbers for inflation.

I'm purposely not doing that in order to keep the math simple just to show you how anybody can do a quick back of the napkin calculation without having to go through and do the crazy inflation adjustment formulas. But in reading about this, I went to the – I was reading through the finance and accounting page at University of Florida and they had a little section for the Florida prepaid college program.

Obviously, UF accepts the Florida prepaid college program. But there is a little note here that simply says none of the plans from the Florida prepaid program right on the website, none of the plans pay 100% of tuition and fees. Listed below are fees that are not covered by any of the prepaid plans and must be paid by the published payment deadline for each term to avoid the assessment of a $100 late payment fee.

And then they list these fees, the transportation access fee, the test fees, technology fees, material and supply fees, distance learning fees, equipment fees, a repeat surcharge, and an excess hours surcharge. Now only two of those fees directly connect over to their published tuition schedule. Those two fees that directly connect over, transportation access fee.

So that's not going to be covered by the Florida prepaid. I'm going to have to pay – my son will have to pay it out of pocket. And then the other one is the technology fee. And that one is $5.25 and that's not covered. So the other fees may or may not be covered.

There's not a direct correlation. Some of these fees that are not covered by the Florida prepaid, for example, it says material and supply fees. That would probably vary depending on classes. If you were signing up for a clay construction class, I don't know, maybe you have to pay for your clay or for a woodshop class, you have to pay for your wood.

I don't know. So I just pulled those two out to keep this accurate. So if you pull that out, it comes down to the current cost that would be covered by the Florida prepaid is $196.27 per credit hour. So what I did here is I calculated $196.27 per credit hour times 120 credit hours.

And that number equals $23,552.40. That number is the total tuition-only cost for the University of Florida of their tuition programs over four years not adjusted for inflation without the fees that are not covered by the Florida prepaid. Now, if we compare that to what my cost is for that same plan, the four-year university plan for my Florida prepaid, then remember here their cost, what they tell me they're going to cover, is I need to pay today $27,379.50.

Remember here that I'm paying $27,379.42 today to pay for something that today I can go and buy for $23,552.40. So that means that I'm paying almost $4,000 more today to prepay this expense than it costs to buy it. And remember, there's a massive discount from what this plan cost last year because remember this plan cost $54,000 last year.

This exact same plan cost $54,000 and it dropped this year to $27,000. Kind of a crazy difference, huh? So I can either pay – I'm going to use just $27,000 today for something that costs $23,000 today. Now, does that make a lot of sense to you? In most things, if we're going to prepay, it's because we're going to get a discount.

But now I'm going to pay more today so that I can pay less in the future. So let's calculate what this rate of return would be. And again, I'm ignoring inflation simply because I want to illustrate that what they're selling here is inflation. So today I can buy this for $23,552.40.

Let's put that number in the calculator here as my future value. That's the number I'm going to wind up with. And this is going to be 17 years from now so I'm going to put the 17 in for my number of periods. For the present value, I'm going to put in what I can make this lump sum payment for, $27,379.42.

Change the sign, put that in for my present value, and $0 for payments. Now, let's calculate this interest rate. What is my rate of return on that payment? My rate of return is -0.88%. So where's the problem? Well, the problem is inflation. And remember, that's what these plans are primarily trying to solve.

They're saying, "Well, college tuition is going up. College tuition is going up. College tuition is going up. And it's going up by double the rate of inflation. It's going up by more than 3% of the general inflation. It's going up. It's going up. It's going up." And the numbers indicate that this is indeed true.

The College Board publishes their college inflation statistics and the latest year for which I have data was 2007. They indicated that college cost inflated at 6.3%. 2006, it inflated at 5.9%. 2005, 5.9%. So under this scenario, if we said, "Well, I'm going to lose almost a percent. I've got a -1% rate of return.

But if I'm going to pull that out of a 6% college inflation rate, 6% minus 1% negative rate of return equals 5%." So therefore, if this portfolio and this plan keeps pace with inflation at 5%, that's 5% rate of return for 17 years. It's not great. It's not bad.

I'll take it. That would be the plan. I have no idea how people bought this when it was $54,000. That just to me is nuts. I really don't understand how they did that. If you put in $54,000 as the present value and run that same calculation, you wind up with a -4.76% interest rate, so -5%.

So you're basically flat. Now, the reason why I guess if people did it then was that they were predicting that college tuition was going to rise at 10% a year or something like that. So basically, when we get out of the weeds of the numbers, we sit here and we say, "I have to make a guess as to what's going to happen with college tuition rates." And you've got to make a guess too.

If you think that college tuition rates are going to continue to appreciate at say 5% to 6% per year, then this type of plan might be a good deal, which by the way, the state of Florida actually refunded some money for people who had made that $54,000 purchase when they cut the price.

But if you're a Florida reticent, research that further. It might be a good deal for you to do this plan. If you say 5%, I'll take it. Now, I don't personally see any possible way that college tuition is going to continue to increase at these prices. Not in a world where – and I'll do a whole show on this at some point.

Not in a world where you can go out and you can buy a fully accredited degree for less than $10,000 depending on where you do it. Not in a world where a bright, intelligent high school student can clap out of two or three years of university just sitting at home and taking tests.

Not in a world where an 18-year-old can finish a college degree – a home-educated 18-year-old could finish their college degree by the time they're 18 just simply with their high school curriculum. Not in a world where the value in real terms seems to be going down and the society is rejecting it because historically – I can't argue against the historical value of a college tuition.

All of the data indicates that if you have a college degree, your lifetime earnings will be substantially higher. All of the data shows that. However, when you dig in a little bit more, I'm convinced that that number is declining and will continue to decline because our society is changing.

So, what are these figures based upon? I haven't actually researched this yet. At some point, I should go and see the data that goes into the college board. But I'm convinced that prices are actually going down because I can go and buy today an accredited degree for much cheaper than I could five years ago.

Now, can I buy it from the University of Florida? No. Their prices have gone up. But do I really care about paying for University of Florida's brick buildings? Some people do. I don't personally care. All I need is to punch the ticket that says, "Hey, I've got a four-year degree." I can do that with home study and distance learning.

Not everybody can, and there might be some scenarios where somebody needs to go to a school. Somebody needs to go to a prestigious university. Somebody needs to get a name-brand education. Well, in that scenario, why not make the school pay you to do it? This is where I get – as a parent, you get down and you say, "This whole system just doesn't make any sense." Because the school system throws money at people who are halfway intelligent, throws money at people who are good at athletics.

There's more money sitting out there for college. There are more cheap options sitting out there for college. Why should I go and invest in a bad investment just so I can save for it? The entire pressure in society is forcing costs down. I just look at Obama's proposal. We're going to give away – what is it?

– a year or two of years of free college tuition. Great. All that means is we're going to transfer the cost from the people who are paying it over onto society. So in a society where this is the pressure, then why on earth in that scenario should I as a parent make any special provision to save for my children's education?

If society is saying this is a societal good, then the children should take advantage of that. And this is where you get into the problem of economic incentives and you get into this big grand discussion about if you put incentives in place, then people are going to follow them.

Yes. If you subsidize college tuition, that will increase enrollment and it will decrease savings by people who can afford to save for it. If there were no subsidies, then people who really cared for it would save for it. I'm intelligent enough to look at it and say if society is going to subsidize this, there's no reason for me to pay for it.

That's how the system is set up to work. And so all of the societal pressure is in a downward direction on tuition and fees. So why take a negative 1% rate of return, real rate of return – excuse me, not – nominal rate of return on my investment? Seems foolish to me.

Now, here's my backup plan. If I'm only buying a portfolio here which is trying to match inflation, then why buy a portfolio for this goal at all? Because I can match inflation with other options. And what I mean is this. If I'm only going to get 5% and that's what they're projecting as inflation, why would I waste any time investing in something that's only going to get 5%?

Why not focus my investment energy onto something that's going to get a much higher rate of return and just pay cash? After all, it is guaranteed that over the aggregate, wages will keep pace with inflation. You can't have a scenario where wages don't keep pace with inflation. And the cool thing about wages is barring – as long as I'm avoiding catastrophe, then I can substantially beat inflation with wages.

So why not just keep my $27,000 in my pocket, invest for something else into which I can invest for a higher, longer-term growth rate, and then pay cash? Cash flow college. Then I've got a scenario where my child doesn't have a bunch of money set aside for their college tuition.

I don't have to deal with financial aid. There would be plenty of financial aid out there. The costs are going to go down anyway, and if I want to write him a check and give him the money when he's 18 years old and he takes half of it and goes to school or takes half of it and builds a real estate empire, I don't know.

It just doesn't make any sense to me. I scratch my head and scratch my head and try to figure out why parents still continue to buy these plans. It doesn't – they don't make sense to me at all. And when I actually think through it, you can see some of the reasons why.

I mean if you disagree with me, I'd love to hear from you. The best reason I've come up with is that parents are simply either out of touch with the reality of current costs, which are nowhere near what the newspapers say they are, or at least they're nowhere near for all of the other options that exist.

They're out of touch with the current job market of the relative less value of a college degree, the relative unimportance of a name brand except, again, boring. There are always exceptions to every general rule. How's that for a general statement? There's always exceptions. So there may be a scenario in which if you want to go and work in government, having a degree from Columbia University or from Yale or from Harvard, maybe that is worth the money to you.

But in that situation, Yale and Harvard parents are not buying in mass the tuition prepaid program. Just write the check and pay for the tuition and buy the societal status for your child. I'm talking about for general people, average people. Yes, you probably need to get a college degree.

But, man, you can get one for cheap. You don't have to pay these absurd prices. I've done financial planning for so many people who are broken out of work with a fancy so-called fancy college tuition diploma, fancy diploma. The benefit is not there. I'm massively overpaid for my diploma.

But I thought I was making a good choice at the time and you can't go back and regret it and change it. But today I would probably think more carefully about it. Of course, I'm also in a very different place than I was when I was 18 years old.

So I think that's enough discussion of that. I don't understand why parents use these plans. If you just sit down and run the number and you just do that, you tell me I've got a negative rate of return. The only thing I can hope to do is this plan is going to keep pace with tuition.

I'll do that in another way rather than getting mixed up with having another government program in which my money is locked up. Now, let's talk about the actual funding of these plans. I went and pulled the Florida annual report. So it looks like this annual report – I didn't print the cover page.

Anyway, I pulled the annual report. This has all of the auditor statements in it and everything like this. I went through and read all the information here. Now, what's interesting is the state of Florida avoided a lot of the catastrophe that many of the other states faced with their prepaid tuition programs because of their more conservative focus, their more conservatively allocated portfolio.

Many of the states were heavily exposed to equities. The state of Florida is not. The state of Florida has a much more conservatively run portfolio with a much higher allocation to fixed income. If you actually look at these numbers here, one of the things that was interesting, what is the state of Florida doing?

Right in their annual report from this previous year – I think this was the 2013 report because of the 2014 – I didn't see it released yet. It was talking about their investment strategy. So it says right here, "The board utilizes Columbia Management Advisors, LLC, which is Columbia Management, Newberger Berman Fixed Income, LLC, Northern Trust Investments, and Standish Mellon Asset Management Company to provide fixed income investment services.

The board's long-term strategy is to immunize the fund against interest rate fluctuations. The board employs an enhanced structured immunization strategy to control interest rate risk while providing higher portfolio returns." So those of you who are bond investors, you'll be interested in that, and that is one benefit that you can get is that a portfolio this large, you can immunize the fund against fluctuations of interest rate.

You can match the duration of your portfolio to the liabilities of your portfolio, and you can try to immunize your fund. A short 30-second class on immunization. Essentially what this is is when interest rates rise, bond prices fall. When bond prices – when interest rates fall, bond prices rise.

There's an inverse relationship between these two things, and it's kind of wacky to wrap your head around until you think about it. Just memorize the rule. Bond prices, the current net asset value of the bond fund and – or of the bond and the interest rate, they're inverse. They have an inverse relationship.

When you have a portfolio, if you have a bond portfolio or an individual bond is fine as well, you have a series of cash flow payments out of that bond, and then you have a terminal value at which that bond can be redeemed. And you can match that – your obligation.

If you have a fixed obligation and you have a bond, you can actually match the liability to the asset. And in that scenario, it doesn't matter whether interest rates rise or fall because you've matched your liability to an asset. That's what immunization is. So when you immunize a portfolio, what you're trying to do is match what's called the duration of your portfolio in a bond fund.

That means how – if you measured – duration is a measurement where if you take the aggregate of all of the cash flows of the individual bonds, the coupon payments and the terminal value, and you – what's it? A weighted average, something like that, and you calculate all that.

At what point – there's a measurement called duration, and you match that to your obligation. I wasn't prepared to go into that today, so I can't do it any more clearly. The point of this is if I go to the section of this report where it's talking about the adequacy of the fund, and you can look this up for your estate.

Go and find their annual report and go and find the actuarial report in there. One of the things that you can find is you can find the calculation of the adequacy of the fund. In the state of Florida, right here from their annual report, based on the assumptions provided by the board, our calculations show that the fund is actuarially sound.

That is the expected value of assets of the fund exceeds the expected value of liabilities, and that excess is defined as an actuarial reserve. If you actually look at it, the present value of the fund's investments is $9.7 billion. The future plan premiums of this fund are $2 billion, and that plus another $6.8 million of other assets, they have a total assets of $11.8 billion.

But they have total future calculated plan benefits and expenses of $11 billion. They actually have an actuarial reserve in the state of Florida of $834 million. So the Florida plan is in pretty good shape fiscally. Another important thing is just simply to go in and look at their economic assumptions, and in the Florida report on page 59, they list those out.

State of Florida has tuition increases. They estimate 5 percent per year for some of the tuition. Some of them is 6 percent per year. Then there's the local fee increases at 5 percent per year, dormitory fee increases 5 percent per year. So you can see they have their assumptions.

My point is that simply they're in about the 5 or 6 percent range. Now check your state. I just for fun, I went and pulled Illinois' program – Illinois' annual report. So here in the College Illinois prepaid tuition program, that's what – and it was a little bit unfair of me to pick Illinois because Illinois can't seem to – you guys can't seem to pay for anything up in your state.

You're behind on everything, woefully behind. So I knew that was probably the case with your college program. So I just went and pulled the report. If you look in the Illinois actuarial calculation, what you find is as of June 30, 2014, the actuarial value of assets for Illinois was $367 million, and the market value of those assets was $328 million.

But the liabilities here – excuse me. I was reading the wrong one. The actuarial present value of – as of June 30, 2014, based upon the actuarial value of the assets, $1.5 billion. I knew there was something wrong. $1.5 billion, but the liabilities on that portfolio – man, I can't get this right.

Forgive me. The value of the assets is $1.1 billion. The liabilities are $1.5 billion. So there's a $367 million deficit on the college Illinois plan. That's tough. Now, what's interesting, year over year, on June 30, 2013, the plan was 72.3% funded. That increased. Those numbers I just read you were actually much better.

It was a 78% funding as of June 30, 2014. So Illinois, you guys are funded at 78%. Is that good? Is that bad? I wouldn't put my money there. Better than some government programs, but I wouldn't put my money there. So you've got to sit down and you've got to figure out, okay, in my state, what makes sense.

To close here, I can see a scenario. I didn't go through all the calculations on the monthly numbers and you can do that if you're interested. This show is exhausting enough with all the numbers that I gave in it. But you've got to look at your situation obviously and you've got to look at your plan.

I think – I don't understand why people use these plans. The only place that I can see personally right now that they're useful is if you're simply doing this and what many people do is they're just trying to lock in the tuition and if that frees you up to focus on other forms of investing.

Now, the numbers do not yet agree with me as far as the mass college inflation numbers. I really need to go look up and see what colleges does the college board include in their numbers so that I can defend this opinion. So you've got to be aware. But the numbers don't agree with me.

I'm just convinced that if you look around and open your eyes – yeah, Josh was about to prognosticate. If you look around and open your eyes, the prices of tuition of what's available are dramatically falling and the value of the tuition in many – the value of the college diploma in many sectors is dramatically falling.

There are plenty of people with college degrees who can't find work. That doesn't seem to be true with very specialized scenarios. So those of you who want to make sure that, hey, I just don't – state school is what I think of. What value is a business degree from the University of Florida or some mainstream communications degree as compared to an online university?

It doesn't matter a bit. There's no more prestige other than the fact that I can wear blue and orange and be a gator or whatever the – was it golden garnet and be a Florida State Seminole and go and have a great party school. That's why most of the students go to those schools because it's a great party school and, yeah, I can get the degree.

But I – unless someone can show me the data that somehow the communications degree from the University of Florida is somehow more valuable than the communications degree from insert cheap online university here. It's just a degree, and all you're doing in that scenario is simply saying, yes, I've got a college degree, so that when companies are screening based upon college degree, you can check the box and say, yes, I've got the college degree.

Now, that might be very different than the political future of somebody with a political science degree from Columbia University or from somebody who wants to go into some very specialized neurosurgery residency. Then maybe the Duke medical program might be better. I don't even know if Duke is known for neurosurgery or not.

My point is that there's always a specialization and the value of those specializations, you have to look at it and say, is there value in the specialization or am I just kind of doing the mainstream thing? For the mainstream approach, I really don't see the value of these types of plans other than it's just – we've got the money and let's go ahead and do it and we hedge our bets.

But man, I've got a lot of other places that I'd rather put money than $27,000 into that plan. If you want to go to the specialization plan, stay tuned for the next program on where we talk about the independent 529 plan and that might be a better option for you because in that scenario, you get a lot of the better good from – you get a lot of the good from being able to lock it in with a guaranteed price, guaranteed tuition.

You know the numbers. But now you're in one of those schools where maybe, you know what? This is my alma mater. My kid is guaranteed to go to this private college. It's very expensive. I can lock it in. I can avoid the investment fluctuation problem and you're really getting the value for it.

I think you'll like that show if that's the scenario that you want to look at. I think that's the majority of what I wanted to cover today. So if you disagree with me, I'd be happy to hear from you. I may have missed something as always. I know I didn't do too many numbers but just look at your actual situation.

I know this is probably a little bit of a niche focus since I think it's only what is it? 18 states that have these prepaid plans. But you've probably at least heard of them. It's hard to – I mean most of the articles I read always have these too and super popular here in Florida but I know maybe some of you don't have these plans.

But at least hopefully you learned something. Again, my plea, just pull out a calculator and find out what the actual cost is. The sad thing is the majority of the people purchasing the Florida prepaid plan have never pulled out a calculator. My guess, they've never pulled out a calculator and said what's the current tuition, read the fine print and tried to figure out what's the rate of return on this.

I cannot for the life of me figure out why anybody would have paid $54,000 last year. Now, enrollment, to be fair, enrollment was dramatically lower in that year because of those price increases. But why anybody signed up for $54,000 lump sum payment for something that today you can go out and ignoring inflation buy for $23,000, that just seems a little bit unwise to me.

But that's it for today's show. I hope you enjoyed this. I hope you learned something. Again, be happy to have your feedback. If this information has been valuable, if I saved you $54,000, consider becoming a patron of the show. We're doing well and what we're working towards here is – let me get this pulled up here.

Almost there. We are over 25% of the way funded towards our initial goal of $2,000 and I'll order some new music for you guys. And we're working hard to get to the $6,000 a month level, which if we can get there by June 1, we're at 49 patrons and a total of $620 per month as I record this show.

So if we can get to the $6,000 a month level by June 1, we'll be able to keep the show free of ads. Make sure to go and check out the benefits. Tomorrow we have the first patron-only Google Hangout where we have a Q&A session. I talk a lot about kind of what's in it for me, the $6,000 a month, but I do have a bunch of benefits for the subscribers and for the patrons.

Check those out. See if they'll be useful. Be back with you tomorrow. Thank you for listening to today's show. If you'd like to contact me personally, my email address is joshua@radicalpersonalfinance.com. You can also connect with the show on Twitter @radicalpf and at facebook.com/radicalpersonalfinance. This show is intended to provide entertainment, education, and financial enlightenment.

But your situation is unique and I cannot deliver any actionable advice without knowing anything about you. Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy, and consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions.

I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes. If you spot a mistake in something I've said, please help me by coming to the show page and commenting so we can all learn together. Until tomorrow, thanks for being here.

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