Prepaid tuition plans are a type of 529 plan that allows you to set aside money now for your child’s college tuition in the future. Prepaid plans allow parents to prepay tuition at current tuition costs, which will save them money in the long run. However, these plans are somewhat more restrictive than 529 college savings plans, which can make prepaid tuition plans less appealing in certain circumstances. 

Of the adults who graduated from college with a bachelor’s degree, 70% reported having student loan debt, according to the Urban Institute. A major benefit of 529 prepaid tuition or 529 college savings plans is that they can help your child minimize or avoid their need to take out student loans. 

How do prepaid tuition plans work? 

A prepaid tuition plan is a college savings plan that allows you to pay for future college tuition at today’s rate. You can purchase units or credits, which cover only tuition and fees. Earnings grow tax-free. These plans are offered through the state or sometimes privately. There are several reasons to consider using a prepaid tuition plan instead of other forms of college savings plans. 

The primary purpose of a prepaid tuition plan is to avoid tuition inflation which runs about 5% per year. Tuition Is Actually Used For – Honest Ads (College Debt) 

After you purchase the credits, the plan administrator will invest the money. However, your payout is guaranteed based on future in-state tuition costs. With a prepaid tuition plan, you may have more peace of mind knowing that your child’s tuition costs are covered, regardless of the economic factors surrounding tuition inflation. 

 

Both the 529 prepaid tuition and 529 college savings plans are very flexible when it comes to contribution limits. 

Many states offer tax breaks to taxpayers who contribute to 529 prepaid tuition or 529 college savings plans. These breaks can come in the form of a tax deduction or a credit, depending on where you live. 

As long as you use the money for qualified expenses, usually tuition and fees, all investment gains made in the account are tax-free. 

The credits in prepaid plans can be transferred to another child in your family if circumstances change. 

Key drawbacks of prepaid tuition plans 

While prepaid tuition plans offer clear advantages, there are also some significant drawbacks that could make them less attractive. 

There is an old Yiddish saying, “Man plans, and God laughs.” Despite our most careful planning, the Road of Life is unpredictable. The biggest issue with the 529 prepaid tuition plans is they almost all assume you’ll be living in the same state eighteen years from now. There is one exception. More on that in the notes. 

Secondly, the terms of these plans are typically based on in-state tuition at one of your state’s public colleges. If you “play your cards right” that won’t be a big problem. One of your main jobs as a parent is to manage expectations. When it comes to college, the time to start managing expectations is when Junior hits middle school. I suggest you read Right College, Right Price as a family. Do the “affordability” exercise and prepare a list of in-state public schools that are a financial fit for your family. Explain to Junior that he can go to college at any school he chooses, as long that school is on the family’s list. 

Unlike a traditional 529 college savings plan, a prepaid tuition plan doesn’t allow you to use your funds to pay for things like room and board, textbooks, supplies, equipment and special needs equipment. So, while tuition is covered, you may want to look for other ways to save to make sure that those additional expenses are also taken care of. 

 

Once you’ve purchased the credits, you will be in the hands of your state’s investment managers, and also be dependent on the state’s funds, which cover the difference if the investment performance isn’t enough to cover the inflation of tuition prices. In the past, some states have closed their prepaid tuition plans to new enrollments and have even closed down entirely because of concerns about funding. I am not aware that any students have lost credits that have been purchased. 

Who prepaid tuition plans are best for 

The pros and cons of prepaid tuition plans may give you a good idea of whether they’re right for you. A few situations where a prepaid tuition plan could be useful include: 

• You’re confident that your child will attend an eligible university in your state. 

• You don’t want your education savings tied to the stock market — funds are guaranteed, as long as the state’s funding is secure. 

• You don’t want to deal with the burden of selecting long-term investments for your child’s education savings. 

 

As you consider whether a prepaid tuition plan is right for you, it’s important to also consider some alternatives. For starters, opening a 529 college savings plan provides many of the same tax advantages but is more flexible in terms of your child’s school of choice and the expenses the plan covers. You’ll also be able to direct how your funds are invested. 

Who is not a good fit for prepaid tuition plans? 

• If you are uncertain about where you will be living and working in eighteen years, you may want to consider a 529 college savings plan. 

• Perhaps, the list of eligible in-state public schools isn’t satisfactory. 

• Savers may want an option that also allows using the money for room and board, textbooks, supplies, etc. (There’s nothing stopping you from opening a 529 prepaid tuition plan and a 529 college savings plan.) 

• Those who want control over how the money being saved is invested. 

 

Bottom line 

Prepaid tuition plans offer a valuable option to get ahead of inflating college tuition costs. However, these plans usually only cover the costs of tuition and mandatory fees, and the saver and beneficiary must live in state, either of which can be too limiting for some prospective college students. 

Notes 

 

The Florida Prepaid Plan overcomes many of the disadvantages of prepaid tuition plans. For example, you only need to be a resident for twelve months to open a plan. 

FAQs – Florida Prepaid College Board 

 

What states offer prepaid tuition plans? 

With the exception of Wyoming, all fifty states and the District of Columbia offer at least one type of 529 savings plan. Only nine states offer prepaid tuition plans, specifically: 

• Florida 

• Virginia 

• Massachusetts 

• Michigan 

• Mississippi 

• Nevada 

• Pennsylvania 

• Texas 

• Washington 

 

You can find more details about prepaid tuition plans and other 529 college savings plans on each state’s college savings plan website. 

Prepaid tuition plan vs. college savings plan 

There are two types of 529 plans — prepaid tuition plans and college savings plans, also called education savings plans. 

• A prepaid tuition plan allows the saver to purchase credits or units at the current price that will cover tuition in the future. 

• College savings plans allow savers to open an investment account to save for the educational future of a beneficiary. 

There are a few key differences between the two types of plans. 

                                                  Prepaid  Tuition                              College Savings 

Type of savings	Savers purchase units or credits that can be used in the future	Savers choose from a range of investment portfolio options, such as mutual funds or exchange-traded fund (ETF) portfolios
What the funds can be used for	Tuition and mandatory fees	Tuition, mandatory fees and room and board
Residency requirements	Saver and beneficiary typically must live in state	None
Guaranteed by the government?	Typically state-sponsored but not federally guaranteed	Not state-sponsored, but some investment bank products may be FDIC insured