A 529 plan is a tax-advantaged educational savings plan operated by an educational or state institution. 529 plans were created by Congress in 1996, and “529” stems from their required compliance with section 529 of the Internal Revenue Code. They are legally known as “qualified education programs.” There are two types: the traditional and more well-known type, “college savings” or simply “traditional” 529 plans, and “prepaid tuition” 529 plans.
Prepaid tuition plans’ main benefit is that they allow you to lock in current tuition prices.
If opt for this type, you would pay a portion of tuition expenses associated with state public or private college education in advance at a predetermined contract price based upon factors such as the grade of the beneficiary, current and projected tuition costs, and the expected rate of return. The funds are transferred directly to the beneficiary’s educational institution upon their enrollment.
Investment options are not applicable in the case of prepaid tuition plans since the onus is on the state to invest your money. They may be be more attractive to risk-averse individuals afraid of losing their contributions in the stock market, although not all states
fully guarantee fulfilling their end of the deal if they fall upon hard financial times.
The costs of post-secondary education have been on the rise, making this plan type a compelling option. After adjusting for inflation, between 2011 and 2016 tuition rates rose by 9% at public four-year colleges, by 11% at public two-year colleges, and by 13% at private four-year colleges, per the College Board.
Where Are Prepaid 529 Plans Available?
While 529 college savings plans are available in all states and the District of Columbia, prepaid tuition plans (or prepaid 529 plans) are only available to those in 11 states: Florida, Illinois, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, Virginia, and Washington (as linked to below).
Florida Prepaid College Plan
College Illinois! Prepaid Tuition Program
Maryland Prepaid College Trust
Massachusetts U. Plan Prepaid Tuition Program
Michigan Education Trust
Mississippi – MPACT
Nevada Prepaid Tuition
Pennsylvania 529 Guaranteed Savings Plan
Texas Tuition Promise Fund
Washington Guaranteed Education Tuition
Quite a few states have ended their programs—11 total between 1995 and 2013.
Perhaps their biggest drawback is that they can usually only be used for public, in-state colleges.
The most common form of prepaid tuition plans is a contract plan, in which you exchange a lump sum or series of installment payments for the obligation of the state offering the plan to pay a predetermined amount of college expenses (such as a number of semesters or years of college). They are similar in function to futures contracts, which give investors the option to purchase assets at a preset price at some point in the future.
Less common are unit plans, in which you’d purchase fractional units or credits that are representative of a percentage of average yearly tuition at the plan’s participating colleges. The value of these units fluctuates from year to year.
There are also voucher plans, which provide a discount of a specified portion of tuition.
Contracts come in an array of varieties that vary between state plans, covering between one and five years of tuition, and some offer the option of being put toward a combination of community and four-year college, just one or the other, and sometimes graduate school as well.
Prepaid tuition plans typically only cover tuition and mandatory fees at in-state public colleges; they are more limited in scope than college savings plans. Some plans allow you to purchase a room and board option. Unlike college savings plans, tuition prices are locked in.
Most prepaid tuition plans have age/grade restrictions.
Most prepaid tuition plans stipulate that you or the plan’s beneficiary must be a resident of the state in which they are offered at the time of application.
Most prepaid tuition plans have a limited enrollment period. For instance, Washington State’s Guaranteed Education Tuition (GET) program has a November 1st–May 31st enrollment window.
Are There Guarantees?
Prepaid plans, unlike college savings plans, are typically sponsored by the state in which they are held and offer some sort of guarantee.
Just four of the 11 states with open prepaid plans are fully backed by the state: Florida, Massachusetts, Mississippi and Washington, while that of Texas is backed by its state public colleges.
Are Private Schools Eligible?
Nearly 300 private colleges offer the Private College 529 Plan, formerly known as the Independent 529 Plan.
What If Plans Change?
Prepaid 529 plans can typically be transferred to a younger sibling of the original beneficiary. If the beneficiary doesn’t want to use it and transferring it is not feasible, or if you would like to cancel it, you will likely receive back your contributions but not gains. There may be a cancellation fee.