Saving for College - Prepaid Tuition Plans

Prepaid tuition plans are investment accounts that allow you to pay for your child's future college tuition (or a portion of it) at today's prices.

Prepaid tuition plans are operated in two ways. The first way is by state governments. The plans guarantee tuition based on an enrollment-weighted average of in-state public college tuition rates. A few states have separate plans for two and four year colleges and for room and board. The second way called the The Independent 529 Plan.. This plans is offereby by a group of private colleges.

Topics

  1. What is a prepaid tuition plan?

  2. What if my child doesn't want to go to school in our home state or she gets into Harvard?

  3. Advantages of a prepaid tuition plan

  4. Disadvantages of a prepaid tuition plan

  5. Where can I find out more about prepaid tuition plans?

1. What is a prepaid tuition plan?

Prepaid tuition plans are college savings plans that are guaranteed to increase in value at the same rate as college tuition. The main benefit of these plans is that they allow a student's parents to lock in tuition at current rates, offering peace of mind. The plans' simplicity is also attractive and most offer a better rate of return on an investment than bank savings accounts and certificates of deposit. The plans also involve no risk to principal, and often are guaranteed by the full faith and credit of the state

2. What if my child doesn't want to go to school in our home state or she gets into Harvard?

If your child chooses not to attend a college covered by the prepaid tuition plan, all is not lost. Although you will not get the benefit of guaranteed tuition, all prepaid tuition plans allow you to use plan money to pay tuition at other colleges and universities. Many state prepaid tuition plans will pay out an amount equal to the weighted average tuition and mandatory fees at your state's public institutions, not to exceed the actual tuition and fees you incur. Most prepaid plans also let you transfer the plan to a child's brother or sister (although age restrictions may prevent transfers to an older sibling). Unfortunately, if your child chooses not to go to college and a sibling doesn't use the plan, or you need to cancel the prepaid plan, most plans will only give you back what you originally contributed with a reduction or elimination of any interest earned. Some plans also charge a cancellation fee.

3. Advantages of a prepaid tuition plan

Guarantees and Safety Features Most states guarantee that the funds you put into a prepaid plan will keep pace with tuition. Some states back their prepaid tuition plans by the full faith and credit of the state, meaning that if the program should find itself in financial difficulty, the state will step in to provide the necessary funding. Other states do not have a formal guarantee, but do have a formal process by which the state's legislature will consider making an appropriation if necessary. Some states offer no guarantees that the plan will fund the future cost of tuition or that the state will step in should the plan falter. With only a few exceptions, however, most prepaid tuition plans do not cover other expenses, such as room and board. So you may want to consider other college savings options to cover these costs.

Some prepaid tuition plans offer tax benefits One of the biggest advantages of 529 plans over other college savings options are the tax advantages they offer. Earnings grow tax-free and withdrawals are tax-free when used for qualified education expenses.

4. Disadvantages of a prepaid tuition plan

Residency Requirements and Other Limitations Unlike college savings plans, most state prepaid tuition plans require either you or your child to be a resident of the state offering the plan when you apply. Some limit enrollment to a certain period each year. Many prepaid tuition plans also have age or grade limits for beneficiaries (i.e., future college students).

Prepaid accounts may limit your investment growth potential Prepaid tuition plans have no investment options. Under prepaid plans, the price of the contract is determined prior to purchase and usually depends on the type of contract, the current grade of the beneficiary, the current and projected cost of tuition and the projected rate of return. These programs then pool the money and make long-range investments so that the earnings meet or exceed college tuition increases. When a child is ready to go to college, the plan transfers funds to cover the tuition directly to the institution.

A prepaid tuition plan seriously reduces financial aid eligibility If you buy a partial prepaid tuition plan, your child's eligibility for need-based financial aid will be hit hard. Unlike 529 Savings Plans, prepaid tuition plans are counted as your child's asset not yours. In many states that means that for every dollar of money invested in a prepaid plan, your child's financial aid will be reduced by a dollar. If you purchase enough credits for a complete four-year degree, your child won't be eligible for any need-based financial aid. But students with prepaid tuition plans are still eligible for merit scholarships that can help pay other school expenses.

5. Where can I find out more about prepaid tuition plans?

The TIAA CREF Institute provides a detailed information about Independent 529 plans./

The National Association of Student Financial Administrators has a state prepaid tuition plan chart that offers basic information about the state-sponsored plans and links to each plan's Web site.

The www.collegesavings.org website of the College Savings Plans Network, an affiliate of the National Association of State Treasurers includes an information clearinghouse of current 529 plans.