For families on the long road to saving for college, prepaid tuition plans can be an attractive option. These plans allow them to pay future tuition bills at today's presumably lower rates. But such plans have become a rare commodity. While 22 states used to offer them, that number has dwindled to just nine as of 2020. Here's a rundown of which prepaid tuition plans exist, where you can still find them, and whether they may be a good choice for you.
- Prepaid tuition plans are 529 plans that allow you to lock in future college tuition costs at today's rates.
- Like 529 college savings plans, their earnings are tax-free if used to pay college tuition bills.
- Only nine states have prepaid tuition plans that are currently open to new enrollees.
- There is also a national option, called the Private 529 Plan.
- Individuals may also choose a college savings plan for students who won't attend an in-state school.
What Is a Prepaid Tuition Plan?
Prepaid tuition plans are a type of 529 plan. They allow family members—parents, grandparents, and other relatives—to pay for a student's college tuition at current rates, even if they don't attend college for years. A prepaid tuition program may be used to pay for future college tuition at any of the sponsoring state's eligible colleges or universities. They may also provide a proportional payment for enrollment at private or out-of-state institutions.
The program does this by pooling and investing the plan's funds, aiming to make enough money to exceed the pace of rising state college tuition. Essentially, you're lending your money to the state's plan in return for the locked-in tuition rate. You can make contributions in regular installments or with a lump sum.
Prepaid plans may be the right choice only if you are absolutely certain the student plans to 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, which means the plan may not cover the full cost.
Another thing to remember is that timing and age are crucial factors for these plans. Most require participation for at least three years before the money can be used. The beneficiary must be no more than 15 years old when the account is opened. And you can't use your account to pay for certain expenses, including room and board.
Which States Offer Prepaid Tuition Plans?
The nine states listed in the table below offer prepaid tuition plans that are open to new enrollment. Note that these plans vary in terms of their guarantees, residency requirements, and other details.
|States With Prepaid Tuition Plans|
|State||Name of Plan||Notes|
|Florida||Florida Prepaid College Plan|
|Maryland||Maryland Prepaid College Trust|
|Massachusetts||MEFA U.Plan Prepaid Tuition Program.||Although technically not a 529 plan, this plan works much the same way.|
|Michigan||Michigan Education Trust|
|Mississippi||Mississippi Prepaid Affordable College Savings (MPACT) Program|
|Nevada||Nevada Prepaid Tuition Program|
|Pennsylvania||PA 529 Guaranteed Savings Plan|
|Texas||Texas Tuition Promise Fund||This plan's predecessor, the Texas Guaranteed Tuition Plan—formerly the Texas Tomorrow Fund—is closed to new enrollment.|
|Washington||Guaranteed Education Tuition (GET)|
Illinois closed its College Illinois! 529 Prepaid Tuition Program to new enrollment in 2017. But it still honors its obligation to contract holders with active accounts. This means there is no change in how benefits are paid or how plans are administered.
Virginia also permanently closed its Prepaid529 program to new enrollment as of May 1, 2019. But it reports that it is developing a "new similar program." Details have yet to be finalized, but there are no changes to the existing account-holders.
Tax Benefits of Prepaid Tuition Plans
Prepaid plans offer participants a safe haven for their capital. Most provide security because they promise to keep up with the pace of future tuition. Certain plans are backed by the full faith and credit of the plan's home state, meaning the government will still provide funding in the event of a financial or economic crisis.
Like 529 college savings plans, prepaid tuition plans have tax advantages. These plans allow contributions to be made using after-tax dollars. This means that you may be eligible to take a state income tax deduction for the money you contribute to the plan.
You also benefit as the investment grows and when you make withdrawals. The account grows on a tax-free basis and your later withdrawals can also be tax-free as long as the money goes toward paying tuition or paying off a student loan. If you choose the latter option, there's a limit to how much you can use to pay off the loan—a maximum of $10,000.
There Is a National Option
If you don't live in one of the states listed above—those that allow residents to take part in a prepaid tuition plan—don't fret. There is an option available to you as well—the Private College 529 Plan.
This plan allows account-holders to lock in tuition rates at almost 300 private colleges and universities in more than 30 states and the District of Columbia. Because it's a national plan and isn't run by one particular state or by individual schools, anyone can invest in them.
When you open up the account, you just name your beneficiary. You don't have to choose a school until the student actually enrolls. You can download the full list of schools, as well as details on how the plan works on the plan's website.
A 529 college savings plan, which all 50 states and the District of Columbia offer, is more flexible than a prepaid tuition plan and can be used for a wider range of expenses.
Prepaid Tuition Plans vs. College Savings Plans
Prepaid tuition plans aren't the only ways for parents to save. States offer other plans that allow people to put money away for their children's college expenses. The other, more common type of 529 plan is the college savings plan. This plan doesn't promise to pay future tuition but simply allows you to save money for post-secondary or K-12 education for a designated beneficiary.
That money may be used to pay for tuition as well as other qualified higher education expenses, including room and board, books, and related costs. This allows account holders to decide where to allocate these funds.
College savings 529 plans are also run by states, but the money can be used for colleges in any state. If the student decides not to go to college at all, the account owner—typically the student's parent—can change the beneficiary to another relative, or withdraw the money and pay income tax plus a 10% penalty on the account's earnings. It may also be possible to change the beneficiary or to receive a refund of your contributions, but not their earnings with a prepaid tuition plan.
The Bottom Line
Prepaid tuition plans are a great option for people who want to save for a child's future educational expenses. They allow you to save your money with tax advantages while locking in today's tuition costs for the future. But only nine states offer this option: Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, and Washington. If you live in one of these states, your beneficiary must attend an in-state college or university, and you can't use the money to pay for any other expenses. If you're unsure, you can always choose the national Private College 529 Plan or a college savings plan.
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Securities and Exchange Commission. "An Introduction to 529 Plans." Accessed Jan. 18, 2021.
College Illinois! "Program Update." Accessed Jan. 19, 2021.
Virginia529. "Prepaid529." Accessed Jan. 19, 2021.
Morningstar. "A Primer on Prepaid 529 Plans." Accessed Jan. 19, 2021.
Private College 529 Plan. "Participating Schools." Accessed Jan. 18, 2021.
Private College 529 Plan. "Plan Details." Accessed Jan. 19, 2021.
Internal Revenue System. "Topic No. 313 Qualified Tuition Programs (QTPs)." Accessed Jan. 18, 2021.
North American Securities Administrators Association. "Understanding College Savings Plans." Accessed Jan. 18, 2021.