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Plan for a Child’s Future with Prepaid College Tuition Plans

Updated on December 16, 2008

Among the many ways to save for a college education, prepaid tuition plans are among my favorite. If you look at the rate that college tuition is increasing, it’s easy to see why locking in tuition rates is a good investment. This article goes over the benefits of prepaid tuition plans as well as what to look out for.

What is a Prepaid Tuition Plan? 

In a prepaid tuition plan, you buy a block of tuition today that will be used at a later date. When the tuition goes up, your stress level doesn’t because you’ve already paid in full for a period of time or a number of credits. While it may seem like a big expenditure today, it’s a lot less than you’ll pay later, especially if your child is still very young. Most four year prepaid tuition plans cost much less than a typical car.

While you don’t get a tax deduction when you purchase a prepaid tuition plan, you also are not taxed on your ‘earnings’ when the money is eventually used to pay tuition. Plans are typically sold at a small premium over today’s tuition rates and can be financed through the plan seller, which may be an individual school or a state. You can also buy shares in a private plan, such as the cooperative Independent 529 Plan, which issues certificates that cover a certain percentage of tuition at one of its hundreds of member colleges.

Note: Depending on the rate you can get, it may make more sense to finance the plan with proceeds from a home equity loan. That way the interest you pay is tax deductible.

The primary criticism of prepaid tuition plans is that they offer a lower return than what a savvy investor could earn by investing in a traditional 529 college savings plan. That depends on how high you expect tuition prices to increase over time. Then there’s the issue of risk. Most plans offer zero financial risk. You won’t have to worry about what the mood of the markets might be when your child is ready to go to school.

5 Facts About Prepaid Tuition Plans  

  • Prepaid tuition plans are usually only good for tuition, not room and board.
  • For financial aid purposes, the plans are considered assets of the parent, therefore minimized their effect on need-based aid.
  • Tuition plans typically only cover in-state tuition costs
  • Many plans allow you to transfer the benefits to another family member
  • Most plans have reimbursement options if children do not attend college at all, do not attend within the participating colleges, or receive scholarships.

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