Prepaid Tuition Savings Plans
Written by Fiona Gu   


This Prepaid Tuition Savings Plans Savings Option is ideal for families that are not knowledgeable about investing. The plans are managed by state governments. They are safe, affordable, tax exempt and convenient for families to save for college! 
 
How it works:
  • If a child attends an in-state public college, then the plans would pay for the tuition and relevant fees.
  • If a child attends a private or out-of-state college, then the plans would only pay for the average tuition of an in-state public college. The child’s family would have to pay for the remainder amount.
  • When setting up an account, most plans require either the owner or beneficiary to be a state resident.
  • Money in the plan is controlled by the account owner, not the children. If the child dies or does not attend college, then the plans can be transferred to other members of the family.
  • If a family moves out of state but the child attends a university in the original state, then the parents would need to pay for any difference between out-of-state and in-state tuitions. However, some universities may still consider the child as an in-state student. In this case, the plan would still cover for 100% of the tuition.
These plans can be used to pay for college tuition directly. Since 2004, individual colleges and universities already have their own prepaid tuition plans. For a list of private colleges with prepaid tuition plans, please see the Independent 529 Plan. 

There are two main types of prepaid tuition plans:
  1. Prepaid Units: 
Plans sell units that are equivalent to a definite percentage of tuition. Usually, one unit equals 1% of a year’s tuition. Everyone pays the same price for the units and the price is on a continuous increase every year. Parents can buy as many units as they desire.
 
  1. Contracts:
Plans sell contracts where parents agree to buy certain number years of tuition. The child’s age and the payment type (lump sum or installment) determine the purchase price. The buying price is lower for younger children because the state would have more time to invest the money.
 
It is important to keep in mind that plans differ among different states. The plans do not guarantee any child’s admission into colleges. Parents should consider the negative effect on the child’s eligibility for need-based financial aid applications (prepaid tuition plans are considered as the child’s asset under financial aid analysis). 

Tip: If the prepaid tuition plan did not have a bad effect on need-based financial aid, a good strategy is to obtain a prepaid tuition plan along with other college saving investments. Before involving in a prepaid tuition plan, parents should diligently evaluate the plan and other investment options.
 
More risk-loving parents should consider to do better investments on their own.
 
Advantages:
  • Allows families to secure future in-state public college tuition at present prices.
  • If a family buys shares that are worth six months (half year), then the shares would always be worth half a year of tuition, regardless of the time.
  • Provides a better investment return than bank savings accounts and certificates of deposit. No principal risk and are guaranteed by the credit of the state.
  • Do not need to pay federal and most often state and local income tax for the plans. Some states provide a full or fractional tax deduction for donations to the state’s plan. 
  • Anyone can invest in a prepaid tuition plan, including grandparents and family friends.
  • Avoids economic downturns. In a recession with rising public college tuition, prepaid tuition plans would increase as opposed to the reduction of other investments.
  • Stimulates parents to save for their children’s education and brings peace among them. 
  • Extremely beneficial to middle-income and upper-income families who are not eligible for need-based financial aid. 
 

 

    

Last Updated on Monday, 26 July 2010 02:10