What Is a Prepaid Tuition Plan?

A prepaid tuition plan refers to one of two major types of 529 plans. The plan allows donors to provide all or part of a student's tuition for college or university, lessening their need to rely on student loans. The amount paid is guaranteed to grow at the same rate as college tuition. Prepaid tuition plans are primarily for students who plan to go to an in-state college or university and only cover the cost of tuition.

Understanding Prepaid Tuition Plans

Prepaid tuition plans allow plan holders to prepay for tuition costs at qualified schools at today's rates. The plan allows account owners—parents, grandparents, and others—to manage future tuition costs at private and public colleges and universities. This means it's a way to pay the cost of tomorrow’s inflated college tuition at current costs. So if the cost of tuition at a specific college doubles within three years, then the plan will pay a proportionate amount of tuition at the time of payment.

Because the cost of tuition is increasing faster than the rate of inflation, the rate of return on these plans is generally greater than that of guaranteed instruments like bonds or 澳洲幸运5官方开奖结果体彩网:certificates of deposit (CDs). These plans are a🎶lso guaranteed byꦍ the financial backing power of each state.

Tuition payments can be made either in a lump sum or through an approved installment plan. While most plans cater to undergraduate study, some prepaid tuition plans can be applied to graduate study as well. Costs covered by these plans generally apply only to the cost of tuition, so other expenses like room and board, health care costs, and materials are not covered.

Special Considerations

Most prepaid plans are guaranteed by the state in which they're administered, so plan holders can be sure their investment will keep up with 澳洲幸运5官方开奖结果体彩网:inflation. Although they're a great way to hedge against the cost of rising tuition, there are actually very few states that have prepaid tuition plans in place. In fact, there are only nine states that allow residents to save up using this plan: Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Texas, Virginia, and Washington. Since they are only available to those living in the respective state, this means the plan's 澳洲幸运5官方开奖结果体彩网:beneficiary must attend an in-state university.

There is another option—the Private College 529 Plan. Instead of being sponsored by the state where they are located, this plan is backed by the institutions themselves. More than 300 private colleges participate in the plan.

Prepaid Tuition Plan vs. College Savings Plan

As noted above, the prepaid tuition plan is one type of 529 plan. The other kind is the college savings plan. Both are tax-advantaged plans that allow an account holder to save for a beneficiary's education expenses by choosing a suitable investment 澳洲幸运5官方开奖结果体彩网:portfolio.

Unlike the prepaid tuition option, a college savings plan allows you to cover costs beyond tuition. 澳洲幸运5官方开奖结果体彩网:Qualified expenses can include supplies, books, and even room and board in some cases.

Withdrawing from a college savings plan is tax-free at the federal level. These accounts previously only allowed withdrawals for postsecondary education expenses. But the 澳洲幸运5官方开奖结果体彩网:Tax Cuts and Jobs Act (TCJA) of 2017 expanded these rules. Parents and grandparents can now use the plans to pay for a beneficiary's annual tuition for K–12 education at public, private, or religious schools.

The Setting Up Every Community for Retir🌳e🀅ment Enhancement Act (SECURE) further expanded these rules after it was signed into law in December 2019. Plan holders can now use their accounts to withdraw a lifetime maximum to pay down $10,000 of qualified student debt. They can also make tax-free withdrawals to pay for tuition and related expenses for a beneficiary's apprenticeship program. The apprenticeship must be approved by the Department of Labor.

More changes came with the 澳洲幸运5官方开奖结果体彩网:SECURE 2.0 Act of 2022. SECURE 2.0 created the opportunity to roll over up to $35,000 from a 529 college savings plan to a Roth IRA. These conversions must abide by the annual contribution limits for the year they take place, and only accounts that have been open for more than 15 years are eligible. The $35,000 is the total eligible for the lifetime of the beneficiary.

Advantages and Disadvantages of a Prepaidꦏ Tuition Plan𝔉

As with any investment vehicle, there are both advantages and disadvantages to putting your mo𓂃ney into a prepaid tuition plan.

Advantages of a Prepaid Tuition Plan

The first, and obvious, advantage is that the prepaid tuition plan acts as a hedge against inflation. Taking part 𓃲in this kind of program guarantees that the money paid will cover the cost of tuition no matter how much it rises over time. Plan holders can also transfer the funds to a younger child or grandchild if the original beneficiary chooses not 🦄to go to college, or if they decide to go to an out-of-state institution.

Disadvantages of a Prepaid Tuition Plan

Prepaid tuition plans can be somewhat restrictive in how they can be used. First, your beneficiary must attend an in-state institution, which means they're limited in where they can go. If they want to go to a school in a different state, you can still get your money back, but you'll lose out on any of the interest the plan has accumulated.

Prepaid tuition plans are also limited in how you can use them. As noted above, you can only use them to pay for tuition, while 529 college savings plans offer a wider range of options. With the latter, plan holders can pay for education-related expenses like books, supplies, and, in some 🍸cases, room and board.

The Bottom Line

If your child has their heart set on a particular in-state school and your state offers a prepaid tuition plan, this could be a great option. If you live in one of the nine states where they are offered, it is worth exploring. But for the majority of parents or guardians, a college savings plan offers much more flexibility.