Saving for College – Which Investment is Right for You? Part II – 529 Plans Prepaid Tuition Plans

By: Abigail Warren, Fall 2017 IAC Student Intern

Interested in 529 Plans?  529 Plans are a popular choice, however, determining which plan is right for you can be a daunting task.  These plans get their name from the section of the Internal Revenue Code that authorizes them – Section 529.  Two basic types of 529 Plans Exist – 529 Prepaid Tuition Plans and 529 College Savings Plan.  All states have one at least one type of 529 Plan, and many have both.  Some private colleges and universities also sponsor prepaid tuition plans.  Being fully informed can ease the stress of picking a plan that meets your needs and goals.

529 Prepaid Tuition Plans

Prepaid tuition plans create the opportunity to prepay tuition at today’s rates at many public and private universities.  Prepaid tuition plans allow you to purchase units or credits at colleges and universities for future tuition.  You can lock your tuition in at today’s rate, which could potentially save you $$$$ in college expenses.  With a prepaid tuition plan, you typically purchase credits or units with a program that goes toward tuition.  These payments can be paid in one lump sum or installment payments, and require a contract that usually ranges from one to five years.  The program then combines and invests all collected money to meet college tuition increases.  While prepaid plans cover future tuition, most do not cover room and board or other college expenses, and all colleges and universities are eligible.

Since these plans are backed by state governments, many guarantee funds.  However, they also have residency and age or grade limit requirements.  The plans also offer no investment options and the contract price is determined prior to purchase.  Don’t worry if you don’t know what college you or dependent will attend.  All of these plans allow you to use the money at other institutions and most will let you transfer the plan to a sibling of the beneficiary, if the beneficiary doesn’t use the money or decides not to attend college.  If you don’t use the plan, you only get back your original contribution and may be subject to a cancellation fee.

If prepaid tuition plans don’t seem like a good fit, 529 College Savings Plans might be a better option.  Check out Part III in this College Savings Series – 529 College Savings Plans.