Prepaid tuition plans allow families to buy all or part of a public in-state education at today's prices. The value of the investment is guaranteed to increase at a rate that coincides with the cost of college tuition. State governments operate the plans, and there are currently 19 states that offer this type of 529 Plan. The main benefit to a prepaid tuition plan is that it allows individuals to lock in tuition at the current rate.
If the student attends an in-state public college or university, the plan pays the tuition and required fees. If the student decides to attend a private or out-of-state college or university, the plans usually pay the average of an in-state public college tuition. The parents or student are responsible for any difference.
Money in prepaid tuition plans is controlled by the account owner not the child. However, the assets are not considered part of the account owner's estate. Prepaid tuition plans also offer the same tax status as Section 529 College Savings Plans.
Beginning July 2006, prepaid plans began receiving the same treatment in the financial aid formula as 529 savings plans. They are considered a parental "asset," causing a dollar-for-dollar reduction in financial aid eligibility.
If the child dies or chooses not go to college, the funds can be transferred to another family member.
If the child moves out of state but attends a participating school, the family can still use the plan; however, the family may be held responsible for the difference between out-of-state tuition and in-state tuition depending on the plan. There are some plans that will treat the student as in-state and cover 100% of the cost.
There are two types of prepaid tuition plans:
- Prepaid Unit
- Sells units that represent a fixed percentage of tuition with one unit typically corresponding to 1% of the year's tuition.
- Everyone pays the same price for the units and the price of a unit increases each year.
- Unlimited units can be purchased each year.
- Contracts
- Sells contracts where a specified number of years of tuition will be purchased.
- The purchase price depends on the age of the child and on the type of payment (lump-sum or installment).
- The contract usually offers lower prices for younger children, as the state has more time for the assets to grow.
Advantages
- Locks in tuition at today's rates;
- Most prepaid tuition plans are guaranteed by the full faith and credit of the state;
- Account owner controls assets, and can change beneficiary;
- Assets are not considered part of the account owner's estate;
- No income phaseout on contributions or withdrawals;
- Same tax advantages as Section 529 Savings Plans — tax deferred growth and tax free withdrawals;
- Usually offer better rate of return than bank savings accounts or CDs;
- No risk to principle, and
- Tend to act as a hedge against economic downturns. In times of recession, state governments tend to reduce support for public education institutions, potentially causing an increase in tuition rates. When other investments are typically dropping because of a declining stock market, prepaid tuition plans will tend to increase;
- Anyone can contribute to a prepaid tuition plan (grandparents, friends, etc.).
Disadvantages
Conclusion
If an investor has a long time to save for higher education costs (10 or more years), we feel that more productive investments that would cover room and board could be made elsewhere. Still, The Henssler Financial Group feels you should investigate Education Savings Accounts, Section 529 Savings Plans and prepaid tuition plans to determine what works best for you. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.
