What is a '529 Prepaid Tuition Plan'

A 529 prepaid tuition plan is a way to pay the cost of tomorrow’s college-inflated tuition prices at current costs.

Unlike using a 529 as a savings plan where you invest money in different asset classes (stocks, bonds, mutual funds), prepaid tuition plans allow you to pay for a certain number of semesters (or contracts) that can be redeemed in the future. These program administrators then pool the money and make long-range investments so that the earnings meet or exceed college tuition increases. When a child is ready to go to college, the plan transfers funds to cover the tuition directly to the institution.

BREAKING DOWN '529 Prepaid Tuition Plan'

Parents, relatives and friends are all allowed to contribute to the child's 529 prepaid tuition plan, which can be especially helpful to grandparents who want to give money to their grandchildren in a tax friendly way.

With tuition increasing at faster paces than expected, many of these plans discovered that they couldn’t invest successfully enough to keep up with rising costs. That put both sides of the equation in binds. Upon realizing the plan would be underfunded, the administrators usually refunded their money back with nominal interest, and parents were left trying to figure out how to pay for tuition.

Keep in mind only tuition is covered in prepaid plans, unlike 529 savings plans that can be used for some room and board, books, equipment and fees.

Another disadvantage is that these plans require that students attend an in-state public school, so if they want to venture far from home you’ll be hit with out-of-state tuition rates.

If the child who is the account beneficiary dies, decides not to attend college, decides to attend college in a state other than the one in which the plan was established or decides to attend a private college, prepaid tuition plans do offer options. Credits may be transferred to another child, contributions may be withdrawn, or the in-state value of the prepaid credits may be transferred to an out-of-state or private institution.

  1. Prepaid Tuition Program

    A prepaid tuition program allows donors to provide all or part ...
  2. 529 Plan

    A 529 plan is a tax-advantaged account for saving and investing ...
  3. IRS Publication 970

    IRS Publication 970 is an explanation of the tax benefits associated ...
  4. Baccalaureate Bond

    A baccalaureate bond is a tax-free, state-issued, zero-coupon ...
  5. Hope Credit

    Hope Credit, or the Hope Scholarship Tax Credit, is a nonrefundable ...
  6. Prepaid Finance Charge

    A prepaid finance charge is an upfront charge associated with ...
Related Articles
  1. Investing

    Spoil Your Grandkids, Cut Your Tax Bill

    Helping your grandchildren save for college is a way to spoil them and reap some benefits yourself.
  2. Personal Finance

    Saving for College: The Advantages of 529 Plans

    A 529 plan is the most popular way for most families to save for college because it offers flexibility, control and tax advantages.
  3. Financial Advisor

    Using 529 Plans to Save for College

    Paying for college is no easy feat. Here is a lowdown on 529 plans, the educational savings plans that help families set aside funds for college costs.
  4. Insights

    Top 10 Companies That Will Pay for School (SBUX, T)

    Scrutinizing employee benefits can help people in the job market chose employers strategically to find companies that will pay for school.
  5. Managing Wealth

    529 Risks to Take (Or Not)

    Six risks to take into consideration when you're managing the 529 plan that lets you put away tax-advantaged money to help your kids pay for college.
  6. Personal Finance

    How to Save for Your Kids’ College Education

    The continuous rising costs of a college education require substantial planning and savings. Starting early is key.
  7. Retirement

    4 Smart 529 Plan Alternatives to Consider

    Learn about some alternatives to the popular college-saving 529 plan that may also make sense, such as prepaid tuition plans and Coverdell accounts.
  8. Personal Finance

    10 Companies That Will Pay for Your MBA (BAC, WFC)

    Discover ten institutions of higher learning that are willing to help finance your MBA in exchange for your commitment to work for them.
  9. Personal Finance

    Maximize College Savings Plans By Starting Early

    The most valuable asset you have when saving for a child's education is time. Here are college savings plans to consider.
Trading Center