Should You Invest in a Prepaid Tuition Plan?
State-sponsored prepaid tuition plans fall under the 529 umbrella, but they are quite different than standard college savings plans. Though the details vary from state to state, the basic idea is standard. Parents pay money now to purchase future college tuition.
There are a lot of benefits here. To start, you pay today's tuition cost regardless of when your child will be attending. That payment secures you a guarantee that your child will be entitled to go to college in the future, no matter how much it costs then. Though most of these plans are designed for state schools, a lot of states include built-in flexibility that allows the funds to be used toward out-of-state or private colleges. If you don't end up using the account to send your child to college, you can transfer the account to another relative, hold on to it for grandchildren, or even get a full or partial refund. One big downside, though: These plans reduce your child's eligibility for financial aid dollar-for-dollar. So if your child wants to go to a private school and the prepaid plan doesn't cover the whole cost, you probably won't be able to turn to financial aid.
How will I know which plan to choose?
Each state's plan is different. But there's a single website that includes detailed information about all of them: the College Savings Plan Network (
Exactly what the plan offers depends on the state sponsoring it. While all states offer full prepaid tuition for four-year colleges, many also let you prepay room and board costs. If you find a state plan that you like better than the one offered by your home state, you may be able to choose a different plan.
Now that you know the basics, it's time to answer the question: Does a prepaid tuition plan make sense for your family? This type of plan may be right for you if:
You don't like risk and uncertainty
You'll sleep better at night knowing that college tuition is guaranteed
You don't expect to be eligible for financial aid
The school your child wants to attend is covered by a prepaid plan
Remember, you've always got the option of investing in both a prepaid tuition plan and an ESA. So any costs not covered by the prepaid plan can be picked up by funds you've accumulated in the ESA, without affecting either's tax advantages.
