Basics of Prepaid College Tuition 529 Savings Plans

Have you noticed an upward trend in college costs over the past few years? I am guessing that you have. College costs have been increasing every year at an average of 6% per year. That means that a public university that costs $10,000 today will cost approximately $29,368 in 18 years. That’s for only ONE YEAR! Are you afraid you will not be able to save that much? What if I told you that you can lock in current college prices. Would you be able to sleep more easily at night? That is the idea behind a prepaid college tuition plan.

What is a 529 Prepaid Tuition Plan?

Prepaid tuition plans are college savings plans that allow you to lock in current college costs. In other words, if you purchase a full years worth of tuition at a state school today, that plan will pay a full years worth of tuition 10, 20, or 30 years down the road. It is guaranteed to increase at the rate of college inflation.

Prepaid Unit Plans

Prepaid unit plans allow you to purchase units that represent a certain percentage of college tuition. For example, you may be able to purchase 1 unit in the plan that represents 1% of college tuition for a year. Everyone pays the same amount for a unit and the price increases each year. You can then use these units to cover part or all of the costs of attending college.

Contract Plans

Contract plans sell, you guessed it, contracts. These allow parents to purchase a set amount of years of tuition at a certain price. Basically, the younger the child, the less expensive the contract price.

Advantages of Prepaid Tuition Plans

  • Allow parents to lock in current tuition rates
  • Very simple to understand and no personal investing required
  • Plans involve no risk of principal and are typically back by state or local government
  • Anyone can contribute to the plan for the benefit of the beneficiary
  • If the beneficiary dies or does not attend college, the funds can be transferred to another

Disadvantages of Prepaid Tuition Plans

  • Have a negative impact on need-based financial aid just like regular 529 plans
  • Cannot earn higher returns if the market has a great year
  • Typically, can only be used for tuition and not for room and board, books, supplies, etc.
  • They do not guaranteed acceptance into college
  • You are limited to the schools that are listed in the plan

Is a prepaid tuition plan right for you? It all depends on the things that were mentioned above. Look carefully at the advantages and disadvantages and make your choice based on those criteria.

You may also want to consider using the plan in conjunction with a standard 529 plan. The standard plan will allow you to invest the savings more aggressively while the prepaid plan may help you hedge against higher increases in tuition rates. One day we are going to have to start paying back all of the government debt we have and education funding may have to be cut. What will happen then? Large increases in tuition, you can be sure of that! I also recommend using the site www.savingforcollege.com. The site offers evaluations of each states plans and has some great college funding calculators.

Has anyone had any experience with prepaid tuition plans? I know they are fairly rare but someone may have an experience they may want to share.

2 thoughts on “Basics of Prepaid College Tuition 529 Savings Plans

  1. Pingback: 529 Plan: How to Save Money for College

  2. Trident

    I think the prepaid tuition plan is a great idea as long as you were planning to attend the university anyways (if the college is a participant in the program). If you got accepted in your dream school and if it doesn’t offer the plan then it wouldn’t be a good idea unless the other schools are of equal caliber.

Comments are closed.