State-Sponsored 529 Prepaid Tuition Plans
By on May 7, 2009
A Prepaid Tuition Plan lets you purchase units of tuition for any state college or university at today’s prices. A semester’s worth of prepaid tuition purchased at 2009 prices would pay for a semester’s worth of tuition at any future date, no matter what the cost of tuition is at that time. Prepaid plans are simple in design and offer better rates of return on investment than bank savings accounts and certificates of deposit. The plans also involve no risk to principal, and often are guaranteed by the full faith and credit of the state.
Prepaid plans are typically more restrictive than 529 Savings Plans in that (1) enrollment qualifications require the beneficiary or account owner be a resident of the state, (2) the enrollment period is only open during a limited time frame during the year, (3) the plan is only available to children within a certain age range or grade level (4) plan benefits must begin distributions prior to certain age and (5) prepaid plans are most beneficial for in-state tuition and undergraduate degrees. Also, due to market conditions in the past several years, some state’s are now charging a premium for their prepaid plans over current tuition prices or revamping in order to regain financial stability, due to lower investment returns over the past several years.
Prepaid tuition plans are most attractive to conservative investors since the plan guarantees to pay for their student’s tuition. Similarly, prepaid tuition plans might be a wise choice for students who are three to seven years away from college since, with such a short investment time horizon, they should be playing it safe. Again, since the risk of being able to cover the rising costs of tuition is being assumed by the plan, you’ll pay a premium; you can’t expect someone to take on a financial risk for nothing. Also, keep in mind that most prepaid tuition plans do not allow enrollment of students beyond the 9th or 10th grades.
Some prepaid plans cover just tuition and fees; other plans will also pay for room and board. If you participate in a plan that does not cover room and board, you’ll have to save separately for those expenses. Like the other college savings options, a prepaid tuition plan can be transferred to another family member. Review all plan details carefully, before taking any action.
