For families on the long road to saving for college, prepaid tuition plans can be an attractive option, allowing them to pay future tuition bills at today's presumably lower rates. But such plans have become a rare commodity.
While 18 states used to offer them, that number has dwindled to just 11 as of 2020 (see below)—and two of those states aren't currently accepting new enrollees, pending changes to their plans. Here's a rundown of which prepaid tuition plans exist, where you can still find them, and whether they could be a good choice for you.
- Prepaid tuition plans are a type of 529 plan 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.
What Is a Prepaid Tuition Plan?
Prepaid tuition plans are a type of 529 plan. They allow families to pay for college tuition at current rates, even if the student will not attend college for years. Timing and age are crucial factors with prepaid tuition plans; most require participating in the plan for at least three years before the money can be used and that the beneficiary be no more than 15 years old when the account is opened.
A prepaid tuition program will pay future college tuition at any of the sponsoring state's eligible colleges or universities—or provide a proportional payment to 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.
It is important to note, however, that prepaid plans may be the right choice only if you are absolutely certain the student 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 and the plan may not cover the full cost.
Prepaid Tuition Plans vs. College Savings Plans
The other, more common type of 529 plan, called a college savings plan, doesn't promise to pay future tuition but simply allows you to save money for post-secondary or K-12 education, on behalf of a designated beneficiary. That money can not only be used to pay for tuition but also other qualified education expenses, including room and board, books, and related costs.
College savings 529 plans are also run by the states, but the money in them can be used for any college 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. With a prepaid tuition plan it may also be possible to change the beneficiary or to receive a refund of your contributions, but not their earnings.
Tax Benefits of Prepaid Tuition Plans
Like 529 college savings plans, prepaid tuition plans have tax advantages. You may be eligible to take a state income tax deduction for the money you contribute to the plan. Your later withdrawals can also be tax-free as long as the money goes toward paying tuition or paying off a student loan ($10,000 maximum).
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.
Which States Offer Prepaid Tuition Plans?
The 11 states listed here either offer prepaid tuition plans that are open to new enrollment or have temporarily suspended enrollment, while they await legislative action or the introduction of a replacement plan. Other states that once offered prepaid tuition plans continue to honor their obligations to past enrollees.
Note that these plans vary in terms of their guarantees, residency requirements, and other details.
|State||Name of Plan||Notes|
|Florida||Florida Prepaid College Plan|
|Illinois||College Illinois! 529 Prepaid Tuition Program||
Currently closed to new enrollment, pending legislative action.
|Maryland||Maryland Prepaid College Trust||
|Massachusetts||MEFA U.Plan Prepaid Tuition Program.||Although technically not a 529 plan, it 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||Its predecessor, the Texas Guaranteed Tuition Plan (formerly the Texas Tomorrow Fund), is closed to new enrollment.|
|Virginia||N/A||Virginia closed its Prepaid529 program to new enrollment as of May 1, 2019, but the state reports on its website that it is developing a "new similar program."|
|Washington||Guaranteed Education Tuition (GET)|
And a National Option
In addition to these state programs, there is a non-state–sponsored prepaid tuition plan called the Private College 529 Plan. It allows account holders to lock in tuition rates at close to 300 private colleges and universities listed on its website.