Freeze Future College Costs at Today's Rates
Prepaid tuition plans, also known as Prepaid Education Arrangements (PEAs), allow families to buy all or part of a public in-state education at present-day prices. The value of the investment is guaranteed by the state to meet or exceed annual in-state public college tuition inflation (currently in the five to eight percent range). Plan costs can vary, depending on how close the student is to college.
Two Types of Prepaid Tuition Plans
A units plan allows you to buy units of tuition (for example, a unit could equal one percent of state college tuition or a set number of credit hours). A contract plan lets you purchase contracts for one to five years of tuition. Account holders can usually contribute to either of the two plans in a lump sum or in installments.
Principal Benefits of Prepaid Savings Plans
- Guaranteed. Accounts are guaranteed by state governments to at least match in-state college tuition increases.
- Low-risk. Prepaid savings plans are considered a safe investment option for families that know where their children will go to college. Even better, they usually outperform typical savings accounts or CDs.
Downsides of Prepaid Savings Plans
- Limited to state residents. Participation in the plans is often restricted to state residents or alumni of state colleges and universities.
- Geared toward in-state public institutions. Your principal plus earnings may not cover tuition and fees if the student decides to attend a private or out-of-state college or university.
- Conservative. For long-term college savers (with at least five years until their student attends college), there may be more productive investing options.
- Refund/cancellation costs. Pulling out of a prepaid tuition plan can result in stiff penalties, including a cancellation cost and/or loss of interest.
- Financial aid. Prepaid savings plans can significantly reduce a family's eligibility for financial aid. Distributions paid to the college are treated like scholarships, reducing a family's need figure on a dollar-for-dollar basis.
- Narrow definition of college expenses. For some plans, funds can only be applied to tuition and fees. Expenses such as room and board, course fees, and books, fall on the family to cover. Other plans allow funds to be used for such expenses if a family ends up with excess tuition units or if tuition and fees are reduced by scholarships.
Note: Each 529 plan has its own set of rules and restrictions, which are subject to change. Make sure to request the most recent plan details from the plan administrators.
More Information on 529 Plans
Collegesavings.org is the information clearinghouse of current 529 plans for the College Savings Plans Network, an affiliate of the National Association of State Treasurers.
Savingforcollege.com is devoted to 529 plans and includes articles, FAQS, and ratings of each state plan. It was founded by accountant and 529 specialist Joseph Hurley.