Prepaid college plans are one form of 529 plan that lets families prepay for future college tuition and fees at current rates. This can be a way to solve problem of rising college costs.
How Prepaid College Plans Work
At participating schools and institutions, families can purchase units or credits that are the equivalent of a portion of the tuition or a particular number of semesters or years. Once the units or credits are purchased, it locks in the current tuition rate (even if the rate rises in future years). Prepaid college plans are connected to a group of public (and sometimes private) colleges. The majority of prepaid plans are sponsored by the state government who typically guarantees the plans' benefits. When the child enrolls in college, the plan will then pay the tuition and fees based on the number of credits and units purchased in the plan. In certain states, contributions to these programs may be tax deductible.
It is also important to note that the plan's beneficiary or buyer must live in the state where it is offered. While some plans allow you to use your benefits at out-of-state or private schools, frequently with modified benefits, the majority of plans are only intended to be used at in-state public universities.
Prepaid Plan Options
Contract Plans let you buy a specific number of semesters or years of tuition at today's current rate. Meanwhile, you can purchase units through Unit Plans, where each unit is worth a certain amount of your tuition.
Important Things to Be Aware Of
If the person planning to go to college decides to go to a different school than one of the specific allowed in-state public schools, the benefits may not fully cover the cost.
The plan's worth may have an impact on the student's ability to receive financial aid.
If a plan is not used as it was intended, there may be costs or penalties.
Compared to 529 Savings Plans:
509 Savings Plans come with market risk, but they offer greater flexibility in terms of investment possibilities and school choice. Contributions to an investment account under these plans may be used for qualified expenses related to education at any approved institution. Earnings and withdrawals for qualified education expenses are both tax-free.
If you want to protect yourself from market risk and are certain that your child will attend an in-state public university, prepaid college plans may be the best choice. However, a 529 Savings Plan can be a better option if you're looking for greater flexibility and possibly higher returns. When making a decision, it's important to take into account your unique circumstances, such as the options available in your state, your financial status, and your child's educational goals.
Comments