Prepaid Tuition Plan – Everything You Need To Know

The cost of education continues to rise each year. In fact, new studies show that schools are increasing their cost of attendance almost every year.

Getting a head start on the cost of your child’s education is huge. Unfortunately, not many families have the funds to do so. But for those who can, we wanted to give you a better understanding of what a Prepaid Tuition Plan is. Hopefully, by the end of this article, you’ll have a clear idea of which plan best fits the needs of your family.

Prepaid Tuition Plan 

Prepaid tuition plans are one of the many savings plans you can enroll in to help pay for your child’s education. As the name implies, prepaid tuition plans, also known as prepaid 529 plans, allow you to prepay for the cost of your child’s education.

Parents interested in purchasing college credits at a higher price for their children can do so with a Prepaid Tuition Plan. Eventually, these parents can cash in the college credits to cover the cost of tuition. For instance, if a public university charges $500 for average credit, then parents may pay $550-$600.

Most colleges/universities in the U.S. require students to take 100-150 credit hours to graduate with a Bachelor’s degree. This means that parents who choose to pursue a prepaid plan would pay more than $60,000 just on tuition credits. This is when it gets tricky, the plan doesn’t cover the cost of room and board, transportation, supplies or other college expenses.  

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What different types of plans exist?

There are three types of Prepaid Tuitions Plans

Contract Plan

  • Best plan for low and middle-income families 
  • Covers up to 5 years of tuition cost 
  • The price is based on the payment type (lump sum vs. installment) as well as the student’s age. The younger the student, the lower the price.

Unit Plan 

  • Covers a fixed percentage of tuition 
  • You can purchase unlimited numbers of units 

Voucher Plan 

  • Sold by colleges and universities instead of states
  • Covers a fixed percentage of tuition 

The good and the bad 

Like any college savings plan, there are a lot of things to consider when determining if the prepaid tuition plan is right for you.

Pros

  • Minimal financial aid impact
  • If earnings are used for college expenses, the withdrawal will be tax-free
  • The plan will keep up with inflation

Cons

  • You must be a resident in the state sponsoring the plan
  • Some states have age and grades requirements
  • Funds in the plan can only be used for college expenses 
  • Every year the enrollment window becomes more limited 

Eligible Schools 

Since Prepaid Tuition Plans are limited by state, there is a restricted list of schools that accept prepaid plans.

  • The majority of in-state public colleges/universities
  • Depending on your state, the prepaid plan may cover graduate school. The same goes for community colleges
  • You can use the funds for out-of-state colleges and universities but you will not be able to use all your funds for such 

To find out which schools will allow you to pay tuition with Prepaid Tuition Plans, click here.

Prepaid tuition plans are savings plans parents have been using for some time now. Though some prepaid plans have either closed down entirely or stopped new enrollment since 2008, many parents still prefer this plan over other options. 

Previously there were 22 states who offered prepaid tuition plans, now there’s only 11. Here’s the list:

As far as savings plans go, you have other options too. Consider these:

  • 529 savings plan and Coverdell (ESA) accounts: Designed specifically for the purpose of education. These plans often come with state tax benefits. However, there’s a 10% penalty fee for non-college related expenses:
  • Roth and Traditional IRA: IRA is an Individual Retirement Account, as such you will be able to use these funds for purposes other than education.
  • UGMA and UTMA accounts: This plan allows parents and grandparents to transfer money for their children/grandchildren’s education. It allows minors to own assets such as properties, stocks, and bonds without established trust funds.  

The prepaid tuition plan is often compared to the 529 plan. It’s crucial to note that prepaid plans also receive the same financial treatment as savings plans. Both plans share similar benefits so we have put together a diagram to give you an overview of their differences:

Be sure to conduct thorough research if you’re debating between the prepaid or the 529 plan. 

Which plan is right for you?

There are many factors to consider when deciding which plan is right for you. Families should take into account the drawbacks of each of the savings plan before making their decisions, such as:

  • Tax benefits
  • Contract flexibility 
  • Unexpected circumstances
  • Attending a specific institution
  • Staying in state 

With the cost of education on the rise, it’s important to get a head start. Whether it’s putting money in a piggy bank or enrolling in a savings plan. Prepaid Tuition Plans are one of the many options you have, to save for your child’s education. Each plan comes with its own pros and cons, but we hope this article helped you find the right plan for your family.