If you have children, you’re most likely thinking (or sweating) about the prospective cost of a college education. And by the time most of us are ready to start sending our kids, it will be even more expensive. So what if you were able to lock in today’s rates? Pretty appealing, right? The 529 Prepaid Tuition Plan is a investment plan that allows you to do so – but there are a few catches.
What Is The Prepaid College 529 Plan?
The Prepaid College 529 Plan (or the 529 Prepaid Tuition Plan) allows you to purchase units of tuition at today’s rate, and use them towards future education.
As of right now, Prepaid Tuition 529 Plans are available in 12 states, with a full faith guarantee in Florida, Maryland, Massachusetts, Mississippi, South Carolina, Texas, Virginia and Washington. According to Betty Lochner, who serves as Director of Guaranteed Tuition (GET) and Vice Chair of The College Savings Plans Network (CSPN) the advantages are in dollars saved.
“If you purchase four years of tuition for your child today, it will pay for four years of school when your child is ready to attend college—even if that is years away.”
Things To Consider
Of course, there are some things to consider when selecting a Prepaid Plan over a Standard 529 Plan. Andrea Feirstein, a consultant with AKF Consulting, says it’s important to be aware that not all Prepaid Plans are guaranteed.
“Often, people think a Prepaid Plan guarantees that the funds will be available when you need them, but as we have seen over the last few years, a number of Prepaid Plans have actually closed to new enrollments due to unfunded liabilities that seemed insurmountable. In these cases, participants sometimes learned too late that the “guarantee” behind the Plan was something less than a full faith and credit guarantee of a State.”
And what if you’re child ends up going to a non-member college, or doesn’t end up going to college at all?
The good news is you still may have options, including using your savings towards the education of another child.
“To avoid penalty and income tax, the new beneficiary must be a member of the family of the preceding beneficiary,” Lochner says. “You should check with the program you participate in to determine if there are other requirements that may apply. You can always get a refund if you will not use your account. Penalties vary by state and federal penalties and taxes will apply for accounts not used for higher education expenses.”
Is It Worth It?
You’re probably wondering whether a Prepaid Plan is the right decision for you. Feirstein says it may be – depending on your situation.
If you’re certain your child (or beneficiary) will be going to college one day, it could be a financially sound decision. “Prepaid Plans give peace of mind for many people who just want to know that tuition is covered.”
Lochner and Feirstein’s most important advice? Make sure you’re an informed consumer. As Lochner says, “be sure to do your research to ensure your plan can fulfill its obligations for your college savings.”
For more about saving for college, read our article on standard 529 Plans.