For families on that long road to college savings, prepaid tuition plans can be a good investment, allowing account holders to essentially pay tuition of the future at the rates of today. But, they've become a rare commodity. Eighteen states used to offer the plans; that number has dwindled to just 11 states. Find out what prepaid tuition plans are, where you can still find them and if they're the right education investment option for you.

IN PICTURES: 6 Ways To Fund A College Education

What's a Prepaid Tuition Plan?
Prepaid tuition plans allow investors to purchase tuition for a student at current rates, even if he or she will not attend college for several years. Timing and age is a crucial factor with prepaid tuition plans, as most require plan participation for at least three years before funds can be used, and that the beneficiary be 15 years old or younger at the time of account inception.

The prepaid tuition program itself pays future college tuition at any of the state's eligible colleges or universities - or it offers cost-weighted payment to private or out-of-state institutions. The program does this by pooling and investing the plan's funds, allowing it to make enough money to exceed the pace of rising state college tuition. Essentially, you're loaning your money to the state's plan in return for the locked-in tuition rate.Tuition can be purchased in monthly installments or a lump-sum. (Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation, read Time Value Of Money: Determining Your Future Worth.)

It is important to note, however, that prepaid plans are often only of value if you are absolutely certain your child will attend an in-state school. While most of the plans do allow funds to be used for out-of-state college tuition, there is often an accompanying penalty, either in the form of a fee or weighted payment based on your state's tuition rates.

The other popular college savings vehicle, called a 529 savings or investment plan, allows participants to save money for K-12 education costs or college, on behalf of a designated beneficiary, who can be a child or adult learner. Contributions to the account and any investment earnings it generates can be used to pay for the beneficiary's qualified education expenses, including books and related education costs outside of tuition. If the beneficiary's education plans change, investors can change the beneficiary, or withdraw the funds in the account for a non-qualified distribution - meaning, the funds are not used for higher education expenses. In that scenario, said earnings, but not contributions, are subject to state and federal tax plus a 10% federal tax penalty. (The Independent 529 plan offers a unique investment for those wanting to send their kids to the best colleges in the U.S., read A 529 Plan Fit For An Ivy League Education.)

Where Are the Prepaid Tuition Plans?
The states that still offer prepaid tuition include Virginia, Maryland, Massachusetts, Mississippi, Florida and Washington. These states guarantee their prepaid plans. Michigan, Nevada, Illinois, Pennsylvania and Texas also offer prepaid tuition plans, but without any guarantee. (Meaning, they can terminate or change the plans at any time without obligation to investors).

The Florida Prepaid College Plan earnings are exempt from federal and Florida state income tax. The child and/or his/her parents must be Florida residents when the plan is initially established, but accounts may be opened by anyone.

College Illinois! Prepaid Tuition Program qualified withdrawals are exempt from state and federal taxes when used for education expenses.

The Maryland Prepaid College Trust is the state's section 529 prepaid tuition plan. Benefits under it are exempt from federal and Maryland state income tax.

Massachusetts U. Plan allows parents of any state to lock in tuition at today's rates at more than 80 participating Massachusetts public and private colleges and universities.

The Michigan Education Trust (MET) (Michigan) was the first state prepaid tuition plan and pays for up to four years of tuition expenses.

The Mississippi Prepaid Affordable College Tuition Program benefits are transferable to other family members. Earnings are exempt from state income tax and contributions are deductible for Mississippi income tax purposes.

The Nevada Prepaid Tuition Program withdrawals are exempt from federal income tax. Nevada has no state income tax.

The TAP 529 Guaranteed Savings Plan credits can also be used, without penalty, at any private college in Pennsylvania or any other accredited college, university, trade or trade school in the United States.

The Texas Guaranteed Tuition Plan (formerly the Texas Tomorrow Fund) is closed to new enrollment.

The Virginia Prepaid Education Program (VPEP) requires that students be in the ninth grade or younger and the account purchaser or beneficiary must be a Virginia resident.

The Guaranteed Education Tuition Program (GET) requires that the beneficiary or account owner be a Washington resident at the time of enrollment. Qualified withdrawals are exempt from federal income tax. Washington has no state income tax.

IN PICTURES: 10 Ways To Budget When You're Broke

The Bottom Line
While prepaid tuition plans are becoming harder to come by, they are still out there, if you know where to look. Consider these viable investment options when seeking the best financial options for looming college expenses that may soon lie ahead. (For more, see 6 Sources Of Student Money You May Have Missed.)

Related Articles
  1. Retirement

    The 5 Best Retirement Communities in Dallas, Texas

    Discover why the Dallas/Fort Worth area of Texas is a popular retirement destination, and five of the best retirement communities in the area.
  2. Taxes

    The Top 10 Caribbean Tax Havens

    Discover relevant tax policy information about the top 10 tax havens located in the Caribbean, including the Cayman Islands and the Bahamas.
  3. Professionals

    How to Protect Retirement and Help Adult Kids

    Parents can both protect their retirement money and help their adult kids. Here's how.
  4. Personal Finance

    Top Universities for Getting an MBA Abroad

    Going abroad for an MBA can add cachet when it comes time to get a job.
  5. Budgeting

    How to Cost Effectively Spend on Baby Clothes

    Don't let your baby's wardrobe derail your budget. These top tips help you to save money and spend wisely on baby clothes.
  6. Budgeting

    Key Questions to Ask Before Moving in Together

    Moving in together is a big step. Here are some key financial questions to ask your partner before you make the move.
  7. Personal Finance

    Avoid These 5 Financial Mistakes in a Divorce

    To ensure you get what's rightfully your's in a divorce, avoid these financial mistakes.
  8. Credit & Loans

    10 Ways Student Debt Can Destroy Your Life

    If you're getting a student loan, think critically about how you will manage your loan. Student debt could have a profound negative impact on your life.
  9. Investing

    5 Ways to Reduce Your Taxes After a Windfall Gain

    Windfall income is a welcome padding to any bank account, but plan for the government's share before you start spending.
  10. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  1. Are Cafeteria plans taxable?

    Whether the benefits you receive through your employer-sponsored cafeteria plan are taxable depends entirely on which benefits ... Read Full Answer >>
  2. Why is the Cayman Islands considered a tax haven?

    The Cayman Islands is one of the most well-known tax havens in the world. Unlike most countries, the Cayman Islands does ... Read Full Answer >>
  3. Why is Luxembourg considered a tax haven?

    Luxembourg has been the tax haven of choice for many corporations and mega-rich individuals around the world since the 197 ... Read Full Answer >>
  4. Why is Panama considered a tax haven?

    The Republic of Panama is considered one of the most well-established pure tax havens in the Caribbean due to extensive legislation ... Read Full Answer >>
  5. Why is Andorra considered a tax haven?

    Andorra is one of many locations around the globe considered a tax haven because of its relatively lenient tax laws. However, ... Read Full Answer >>
  6. Student loans, federal and private: what's the difference?

    The cost of a college education now rivals many home prices, making student loans a huge debt that many young people face ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!