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529 prepaid college tuition plans, sometimes known as Qualified Tuition Programs, are state-sponsored savings plans. They are designed to allow state residents to pre-purchase all or part of tuition at a public in-state college based on today’s tuition rates. This type of plan may be attractive to you if you are uncomfortable with the challenge of choosing and managing investments as a part of the college savings process.

A PREPAID PLAN CAN HELP KEEP COLLEGE COSTS DOWN

The 529 prepaid college tuition plans can help protect you from the increasing cost of college:

• Tuition is purchased at today’s rates. Prepaid plans allow you the opportunity to start paying for future college tuition based on prices determined today—providing protection against rising tuition costs.
• Guaranteed by the state. In the case of prepaid plan, the state that sponsors your plan is responsible for investing the money.  There is only one non-state-sponsored prepaid plan, the Independent 529 Plan.

THERE ARE TWO MAIN TYPES OF PREPAID PLANS

There are generally two ways to prepay public in-state college tuition through a prepaid plan. Each of these methods usually provides plan owners with the option to contribute a lump sum or through installments.

• The units plan. Prepaid unit plans sell units that represent a fixed percentage of tuition, with one unit usually equaling 1% of a year's tuition (or a certain number of semester hours).
• The contract plan. This type of prepaid plan sells contracts that allow the plan owner to buy a specific number of years of tuition, often in the form of tuition credits. The purchase price usually depends on the age of the child and the type of payment (lump sum or installment). Contract plans tend to offer lower prices for younger children, since the state has more time to grow the money before the child attends college.

KEY FEATURES OF PREPAID PLANS

Take some time to become familiar with the key features of prepaid plans, but remember to check you home state plan for specifics.

• Residency requirements. Most prepaid plans require that either the plan owner or the beneficiary be the resident of the state in order to set up an account.
• Designed for use at a public college. The funds in your plan generally can be withdrawn to pay for qualified expenses (tuition and fees) at any 2- or 4-year public college in the state in which the plan was opened.  Check the specific plan for details or limitations.
• Can be used at private or out-of state colleges. While a prepaid plan is intended for use at a public, in-state school, the student may decide to attend a private or out-of-state college.  If this is the case, the plan will typically pay out the average of in-state public college tuition. The student or his or her family will then be responsible for the difference, if any.  However, please check your plan for any limitations.
• Covers tuition and required fees. In some cases, prepaid plans only cover the cost of tuition and required fees at the eligible college or institution. Expenses such as room and board and books may not be covered.

TAX BENEFITS

All 529 prepaid college tuition plans generally feature similar tax benefits as the 529 college savings plan. These include:

• Federal tax-free growth and withdrawals. Money in a prepaid plan grows tax-free and when you withdraw funds to pay for qualified expenses (tuition and fees at a public in-state college or university), the money is also free from federal income tax. It’s important to note that if you withdraw plan funds and use them for non-qualified expenses, taxes and penalties may apply.
• Potential state tax benefits. Depending on your home state’s plan, you may also benefit from state tax-free growth when you withdraw plan savings to pay for college. Be sure to review your state’s prepaid plan carefully to see if any state tax benefits are available to you.
• Tax-free gift amounts. A gift amount of up to $13,000 given by anyone to a single beneficiary per year is generally not subject to the federal gift tax or the estate tax.
• Tax benefits for larger gift amounts. Even those who give up to $65,000 to a beneficiary in a single year (or $130,000 if married and filing jointly) can reduce gift and estate taxes. This is accomplished by electing to treat the gift as having been made over a period of up to five years (as long as they make no additional contributions during that time). Please discuss this option with your tax advisor to see what options may be available to you.

PLAN OWNERS AND PLAN BENEFICIARIES

529 prepaid tuition plans are designed to be flexible for both potential plan owners and the students the plans are intended to benefit. However, there are certain rules and restrictions to consider.

• Anyone can open a plan. Provided they meet the minimum age limit (which varies by state) and residency requirements, a 529 prepaid tuition plan can be opened by anyone – a parent, relative, or even a family friend. In addition, there are no income limitations to open a plan account.
• Either the plan owner or beneficiary must be a state resident. Most prepaid plans require that the plan owner open a plan either in their home state or in the state of residence of the intended student. However, in some plans, both the account owner and beneficiary must be state residents.
• Defined enrollment periods and changes in pricing. Most prepaid plans allow you to become a plan owner at specific times of the year. It’s important to note that the pricing of most prepaid plans change every enrollment period. Visit the plan’s website for complete details.
• The plan’s owner has control over the money. The account owner of a 529 prepaid tuition plan has control over who will benefit from the plan and how to allocate funds.  If the money is spent on non-qualified expenses, penalties and taxes will apply.
• Any child can be a plan beneficiary. Although a 529 prepaid tuition plan is designed to help you pay for a student’s future public college expenses, it doesn’t matter if you are related to the child.
• You can change the plan’s beneficiary. Most prepaid plans allow changes of the beneficiary to another member of the family. However, many plans include a time limit for withdrawals based on the date the student is likely to graduate from high school or enter college. Therefore, certain age restriction may apply.

Purchasers of 529 prepaid tuition plans should carefully consider the features, risks, service and other charges and expenses associated with the Contracts.  The plan's disclosure documents contain this and additional information about the plan.   Please read these documents carefully before investing.

Prepaid college tuition plans can be a savings option for investors.  In addition, the earlier you open a plan and start saving, the more the plan may help protect you from rising college costs. If this type of plan interests you, review the ‘Some Things to Consider’ section to get a more in-depth picture of prepaid plan rules and restrictions.
 

Purchasers of 529 prepaid tuition plans should carefully consider the features, risks, service and other charges and expenses associated with the Contracts.  The plan's disclosure documents contain this and additional information about the plan.  Please read these documents carefully before investing. You can obtain a copy of the plan document from each 529 plan sponsor.