Saving for College with Prepaid Plans
Prepaid 529 plans allow you to save money on the cost of attending college by pre-paying for some of the costs. When there is a decade or more before the beneficiary attends school, these plans can save a significant amount of money with lower market risk than traditional 529 saving plans.
States sponsor most P repaid Savings Plans, although independent colleges and universities can also create 529 pre-paid saving plans. One independent plan includes 274 private universities across the country. Each option provides a group of qualifying schools and a process for converting the pre-paid tuition if the student chooses a school outside of the school network. Much like health insurance offers more benefits for in-network doctors, schools provide a strong incentive to attend partner schools.
There are three basic setups for buying a prepaid plan. You may purchase a contract, units, or vouchers. A contract prepays tuition for a certain number of semesters or years at an in-state public college or university. Units allow investors to buy partial units of a year’s tuition based on the current average rates of participating schools. They charge a premium over today’s prices to account for inflation, but over time can offer lower prices depending on how much tuition rises. You also benefit if the child attends a more expensive school within the network. Vouchers operate like a coupon. You pre-pay a percentage of the tuition allowing you to buy credits at a lower rate when the time comes for the beneficiary to attend school.
One of the downfalls of the traditional 529 savings plan is market volatility. Prepaid plans often offer account guarantees by the state, protecting your investment and leading to more account stability, which can be a real benefit if college costs continue to rise faster than inflation.