By Kristina Ludwig, Fall 2014 Student Intern
529 Prepaid Tuition Plans allow you to lock in today’s college tuition rate (at eligible public and private institutions) so that you do not have to worry about future tuition increases. Tuition is then paid either in a lump sum or through installments, depending on the options you choose. Some plans cover two-year community college, a four-year undergraduate program, or a combination of the two for up to five years of tuition. Some plans can be used to cover graduate school tuition.
Unlike the College Savings Plan, however, Prepaid Tuition Plans generally only cover tuition and do not cover other expenses such as room and board. Also, most state Prepaid Tuition Plans have residency requirements and a limited enrollment period each year. Some even have age or grade limits for beneficiaries.
However, most states will guarantee that the amount of money you put into a Prepaid Tuition Plan will keep pace with the rising tuition costs. Also, unlike College Savings Plans, some states will even back their Prepaid Tuition Plans with the full faith and credit of the state, so if the program falls upon financial troubles, the state will come in and provide the necessary funding. Prepaid Tuitions Plans are also exempt from federal income tax and are also often exempt from state or local income taxes as well.
For more information on Prepaid Tuition Plans, visit FINRA’s website here or the FinAid website here. For more information on 529 plans, listen to FINRA’s very informative podcast here. For a side-by-side comparison of 529 plans, visit FINRA’s website here and scroll down to the 529 Plan Comparison Chart.