College is a major expense. Even with years of thoughtful saving and planning, the costs can add up quickly. Prepaid college plans are one option families are choosing to work out a smoother financial process for students and parents alike. These plans used to be more readily available in the past. Still, it’s worth looking at prepaid college plans, where you can get one, and whether they’re a smart financial decision.
What Are Prepaid College Tuition Plans?
If you have a student who definitely plans on going to college someday, a prepaid college tuition plan can help set them up for success. You, as a parent, guardian, or relative, can start paying for college now, long before the student actually attends. This locks in the current tuition rate. Even as tuition costs go up in subsequent years, these plans allow you to keep paying the tuition rate you initially locked in.
You can think of it as a loan of sorts. You pay up front, and the state earns money off of those payments. When it comes time for your student to attend college, the state pays the tuition out of the funds you provided.
Of course, you need to be confident in your student’s plans for this to work. You will probably need to live in the same state as the college the student will attend since these plans tend to apply only to in-state tuition.
Pros and Cons of College Prepaid Plans
Obviously, locking in a lower tuition rate can be a tremendous financial benefit. With college costs constantly on the rise, a prepaid tuition plan offers the potential of a steep discount. And you might even enjoy some tax breaks if you choose this approach, such as a deduction based on your contribution to a prepaid plan, depending on where you live.
However, this sort of plan can be somewhat inflexible. You may be limited in the choices you have in terms of schools. While you can get a refund if your student chooses a different school than you all expected, you may end up feeling some pressure to stay the course when investing in a plan like this.
And you can’t use the money freely. There are restrictions to how you can use the funds in a prepaid college plan. For example, room and board probably aren’t covered. These plans generally focus specifically on tuition and fees.
Despite this, many choose prepaid college plans to lock in a rate. They also enjoy the high contribution limits and tax benefits. Here are the major pros and cons of these plans.
| Pros | Cons |
|---|---|
| Steady tuition rate | Lack of flexibility |
| Tax breaks | Eligibility limitations |
| High limits | Lack of control |
Prepaid College Plans vs 529 Program
College prepaid plans and 529 college savings plans are similar. They serve the same basic function. However, when you look closer, they can be quite different. Prepaid tuition plans are a type of 529 plan, in fact, but 529 savings plans have distinct features that might sway your decision about investing in one or the other. Here are three of the biggest differences.
| Prepaid College Plan | 529 Savings Plan | |
|---|---|---|
| Timeframe | You must start investing within a certain time period. Different states will have different rules about this. | You can generally invest whenever you like. |
| Flexibility | These plans are less flexible. You generally have to spend the money on tuition and fees specifically. | You have more flexibility in how you spend your money here. You can use funds for books, room and board, and other expenses, as well as tuition. |
| Risk | These plans are stable. However, they won’t earn much over time. If your student changes their mind and you withdraw the money, expect to break even. These plans aren’t risky, but they aren’t going to earn much either. | This is an investment. It could earn far more than a prepaid plan, but it does involve stock investments. |
The National Prepaid College Plan
While many prepaid college plan options are state-run, there is also a national program called the Private College 529 Plan. Unlike other prepaid college plans, there’s no state residency requirement to join this plan. It applies to nearly 300 colleges and universities. However, they are all private institutions, not public. They span 30 states plus the District of Columbia.
The national plan offers a bit more flexibility than state plans, and you don’t need to choose a school to start saving. That decision can wait until your student is actually enrolling, in fact. As long as it’s one of the private institutions that are part of the plan, you can use your funds there.
Recommended: How to Start Saving for Your Child’s College Tuition
States With Prepaid College Plans
Only nine states still have prepaid college plan options, and each state will offer something a little bit different. You can compare all of the options below to see if any of these state plans work for you.
| State | Plan | Features |
|---|---|---|
| Florida | Florida 529 Prepaid Plan | The child must be a Florida resident. This plan covers tuition and fees and you can opt into a one-year dorm plan as well. Florida lets you use this plan nationwide and it’s guaranteed by the state so you won’t lose money. |
| Maryland | Maryland Prepaid College Trust | You can start by prepaying for just a single semester. This plan also works for out-of-state tuition. And it offers an income tax deduction for Maryland residents. |
| Massachusetts | Mefa U.Plan | You can contribute the full cost of tuition and fees to this plan, which is invested in bonds. You can transfer the funds or cash out and receive your investment plus interest if your plans change. |
| Michigan | Michigan Education Trust | Michigan offers a discounted, age-based pricing structure. Plus, you can transfer the funds to other family members. The funds work at in-state, out-of-state, and even trade schools. |
| Mississippi | MPACT | You pay a lower monthly rate for younger children when you enroll in this plan. You have to use the funds on tuition and fees, but anyone can contribute to the plan. |
| Nevada | Nevada Prepaid Tuition Program | There are some eligible out of state and private institutions that qualify under this plan. The student must use the funds within six years of graduating high school. |
| Pennsylvania | PA 529 Guaranteed Savings Plan | This plan only applies to state universities. However, you can also use it for up to $10,000 at elementary and secondary public, private or religious schools. You can alter your contribution levels at any time by changing your tuition level. |
| Texas | Texas Tuition Promise Fund | Save for public colleges and universities in Texas with this plan, excluding medical and dental institutions. You must enroll between September and March. |
| Washington | Guaranteed Education Tuition | You can use your funds on schools nation-wide. You can even use the funds for room and board, books, computers, and other expenses. As long as you use the funds for higher education, they won’t be subject to tax. |
Are Prepaid College Plans Tax Deductible?
It depends on the state and plan, but in many cases, yes! There may be stipulations, though. For example, you’ll probably have to use the funds for higher education only. However, withdrawals for educational purposes may be tax-free. Moreover, your contributions to the plan could earn you deductions.
Are Prepaid College Plans Worth It?
That depends on where you live and what your student’s goals are. If the future is pretty certain, or you live in a state with a very flexible plan, a prepaid college plan can be a safe, stable way to save up money for college.
Because of the limitations and lack of flexibility, though, it may not be right for everyone. If, for example, you want to be more aggressive about your college planning, a 529 savings plan might suit your goals better. Plus, you can spend that money on things beyond just tuition and fees.
Recommended: Parent PLUS Loans vs Private Parent Student Loans for College
Alternative Methods for Prepaid College Plans
Beyond a prepaid tuition plan, you can also try a college savings plan to build up cash for college. This allows you to save up money and spend it on qualified education expenses. It doesn’t lock in a tuition rate, but because it’s a more aggressive type of savings plan, you could end up saving up more money in the long run.
There is also a national option. This plan applies even in many states that don’t have their own prepaid tuition plans. It also locks in rates, but you will have to choose one of the schools covered by the plan. Luckily, there are almost 300 to choose from.
Of course, if your child is headed to college in the next few years, you may not have time to save much money. Parent PLUS loans can help. When an undergraduate’s financial aid doesn’t meet the cost of attendance at a college or career school, parents may take out a Direct PLUS Loan in their name to bridge the gap.
The Takeaway
The thought of large student debt scares off many who would otherwise attend a college or university. But with some strategic and long-term planning, college can fit in the budget. You can mix and match approaches to find what works for you. For example, you could combine a prepaid tuition plan with a private student loan to pay for college. No matter what you ultimately choose, it will help to start planning well in advance.
Photo credit: iStock/dangrytsku
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