Prepaid college tuition plans can offer a tax-advantaged way to save for college. Not only can they help protect you from the rising tuition costs, you don’t have to worry about the ups and downs of the market either. However, before you decide to invest in a prepaid plan, you should consider the following:
- Limited to state residents. Check your state plan for resident requirements. Some plans require the account owner, the beneficiary, or both, to be a resident.
- Geared to in-state public colleges. With the exception to the Independent 529 Plan, the state sponsored 529 prepaid college tuition plans are designed to be used at in-state public schools. If the student decides to attend private school or an out-of-state school, the money you’ve saved is generally accessible, but may not cover all out-of-state school costs.
- Qualified expenses may cover only tuition and fees. In some cases, funds from a prepaid plan can only be used to pay for tuition and fees at a public in-state school, and cannot be used to pay for room and board, books and other college-related expenses.
- Time constraints. Most prepaid plans specify that the money saved in the plan must be used within a certain number of years after the child graduates from high school. If a child doesn’t attend college or chooses to delay starting college, you could incur certain fees or penalties.
- Short enrollment window. Unlike 529 college savings plans, which allow you to open account throughout the year, most prepaid plans have a specific enrollment period during which time a new account can be set up.
- Refunds and cancellation costs. Make sure you understand the terms of your plan before you invest. If you cancel your plan or seek a refund, you may experience penalties and loss of interest or adverse tax consequences.
- State guarantee. While most states guarantee to meet rising tuition costs, it’s important to learn how your state’s plan will handle potential shortfalls before investing. Though no plan has defaulted on its responsibilities, some state plans have stopped accepting new plan owners.
- Conservative growth. Assets in a prepaid plan tend to be invested conservatively to keep up with the rising costs of college tuition. But if you’re seeking higher returns and earning more over time (and are comfortable taking on additional risk), you may want to consider another type of college savings strategy.
While somewhat restrictive in nature, prepaid tuition plans may be an option for those who are not comfortable with investing in the market.
So, if you feel that a prepaid plan is the way for you, take some time to understand the specifics of the plan offered in your state. Also remember, you don’t have to choose between a prepaid plan and your own savings efforts. The two options are not mutually exclusive, and you can tap into the benefits of many different products as you look to save for a child’s higher education. For example, you can use a prepaid plan to save for tuition and fees, and then use other savings options for the costs of college room and board and other expenses.
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.