529 Prepaid Tuition Plan: Is It Right For You?

There are generally two types of 529 education savings plans: traditional investment accounts and prepaid tuition plans in which you prepay tuition for the future at today’s prices. The plan you choose varies based on whether your state offers a prepaid tuition option, how much flexibility the plan gives to choose or switch colleges, and whether you are fairly certain your child will attend a school on the list.

Here’s what you need to know about prepaid tuition plans.

What is a 529 Prepaid Tuition Plan?

Prepaid tuition plans are offered by 10 states, and they give participants the option to pay for future tuition at today’s prices. The Private College 529 Plan, allows you to do the same at a selection of private colleges.

In a prepaid tuition plan, tuition can be bought in percentages of a year’s tuition, or as a contract commitment for a specific number of academic credits. The tuition and fees are generally set in tiers, such as for community colleges, lower-priced state universities and higher-priced state universities. Parents need not always be the account owner; in most cases, if a grandparent or guardian is a resident of the state, they could open an account for the student. The exact rules may depend on the state.

Depending on the plan, you may be able to cash out part of your contribution for a private or out-of-state college equal to what the tuition would have been at a college in the tier you chose.

For instance, let’s say tuition and fees cost $8,000 at the college you’re saving for the year the contract is redeemed. The private school costs your student $18,000. If you transfer your funds to the private school, $8,000 could come from the plan. The remaining $10,000 would come from other sources such as financial aid or the parents’ income.

The Private College 529 Plan works in a similar way. If you buy a plan for one school, you can also choose another one and pay the difference directly to the college.

Because prepaid plans secure future tuition at today’s prices, there may be an age or grade limit that dictates whether your student qualifies. For instance, the plan may only accept students who aren’t past their first year of high school.

How is a Prepaid Tuition Plan Different from a 529 College Savings Plan?

A prepaid tuition plan’s value is based on tuition and fee rates if used as the plan states. Traditional 529 plans, on the other hand, are investment accounts, and the plans’ value is based on contributions plus earnings. Additionally, most state prepaid tuition plans restrict participation to residents only, while traditional state-sponsored 529 savings plans generally allow non-residents to open an account.

Both plans don’t charge taxes on withdrawals for educational purposes or for growth in account value. Both grow and can be withdrawn from tax-free if used for qualified higher education expenses.

What Does a Prepaid Tuition Plan Cover?

Prepaid plans generally cover tuition and fees only. Some plans cover room and board if purchased separately as part of a room and board plan, but they never cover textbooks. Plans may or not be applicable for grad school at full value. The Private College 529 Plan covers more than 300 private schools, but participants must purchase the credits for a specific school.

For instance, let’s say both parents went to Harvard, and they hope their child will do the same. If the student decides to go elsewhere, only the value of Harvard’s tuition and fees will be applied to the school the child chooses.

How Do You Enroll in a Prepaid Tuition Plan?

Prepaid plans generally have enrollment periods in which you can buy units or contracts for tuition and fees, or room and board. The time of year for the enrollment period can vary by state. Thus, you should check the rules of the plan you are interested in to find out the dates for enrollment so you’re ready to purchase the credits when it opens. If enrolling in the Private College 529 Plan, you can enroll anytime of year.

To sign up, you can generally fill out an online application and decide how much tuition you want to buy. You can purchase new tuition units, credits or certificates during each enrollment period. In some cases, you can sign up for an installment agreement to avoid paying annual lump sums.

Is a Prepaid Tuition Plan Transferable?

Like traditional college savings accounts, the account owner can change the beneficiary, the person designated to use the account by the account owner, to another child or themselves if the original beneficiary no longer needs the account. Perhaps the account owner bought the tuition credits when the child was three, for example, and they didn’t know the student would decide not to go to college. Another example is their child received a scholarship, so the credits would be better used by their sibling.

Who Should Consider Using a Prepaid Tuition Plan?

Prepaid tuition plans have several uses if you have access to them. Prepaid plans can be a great idea for a parent who wants to make sure they can afford a specific percentage of their child’s education. In traditional 529 plans, it’s harder to know if the amount you are saving will keep up with college inflation at specific schools.

Prepaid plans can be more inflexible than traditional 529 plans, however, and there are fewer to choose from. If there is a high amount of uncertainty in where your child will go to school, and you want to know you can use the funds for a range of expenses, a 529 savings plan may be a better choice.

What Are Your Options to Prepay Room and Board?

Your state may have a separate prepaid tuition plan for room and board. It works the same way as a prepaid tuition plan, where you’ll pay for dorms and meal plans at today’s prices. The alternative is saving in a traditional 529 plan. Then, whatever the cash value of the plan would be is the amount that could be applied to room and board or other qualified higher education expenses.

How Many States Offer Prepaid Tuition Plans?

There are currently 10 states offering prepaid tuition plans. Of those, six are contract plans, meaning they’ll allow you to pay now for semesters of tuition in the future:

• Florida Prepaid College Plan
• Maryland Prepaid College Trust
• Michigan Education Trust
• Nevada Prepaid Tuition Program
• Mississippi Prepaid Affordable College Tuition Program (MPACT)
• Massachusetts U.Plan Prepaid Tuition Program

The other four plans are:

• Pennsylvania Guaranteed Savings Plan
• Washington Guaranteed Education Tuition (GET)
• Texas Tuition Promise Fund
• Private College 529 Plan

Using a 529 Prepaid Tuition Plan

The main reason to open a prepaid tuition plan is to guarantee that you have saved enough to pay for a certain type of college for your child. However, you may get more flexibility in how your student chooses to use the funds with a traditional 529 plan. Plus, only residents of 10 states can open prepaid tuition plans—though families can also choose to enroll in the Private College 529 Plan.
Consider all your options carefully, and you may decide to hedge your college bet by investing some money in both types of plans.