What is a 'Prepaid Tuition Program'

Prepaid tuition programs are one of two major types of 529 plans and allows donors to provide all or part of the amount of tuition for college education. The amount paid is guaranteed to grow at the same rate as college tuition, regardless of its rate of growth over time. If the cost of tuition at a specific college doubles within three years, then the amount of prepaid tuition will pay a proportionate amount of tuition at the time of payment.

BREAKING DOWN 'Prepaid Tuition Program'

A prepaid tuition program is a way to pay the cost of tomorrow’s inflated college tuition at current costs. Prepaid tuition plans allow donors to lock in the future cost of tuition in today's dollars. 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 such as bonds or CDs. But these plans are also guaranteed by the financial backing power of each state.

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