Prepaid Tuition Programs
Lock in today's tuition rates even though your child may not be attending college for many years. There are several types of prepaid tuition programs. In most cases, participants are allowed to pay for their children's college tuition from the day they are born until the day they enroll in college. Participants are afforded the ability to pay a fixed price for tuition based on the rates at that time, and the price is locked in while the rates for non-participants are rising.
Although each state that features a Prepaid Tuition Plan has slightly different guidelines (see our section below for access to individual State info), there are usually two ways to save:
Prepaid Units
Prepaid unit plans offer the chance to purchase a fixed percentage of tuition. Everybody in the plan pays the same price for each unit and the price of a unit increases each year.
Contracts
Contract plans sell the contracts that allow the parents to purchase a specified number of years of tuition. The purchase price fluctuates and depends on the age of the child and whether or not there is a lump sum payment involved, or whether you've opted for monthly installments.
The advantage of a Contract Plan is that it can offer a lower rate for younger children since it gives the state more time to hold onto your money and invest the funds.
Check your own State's rules & regulations for any Plan you are considering.
For a list of telephone numbers and links to the Web pages of the programs now operating, please click here. For more information, please contact the individual programs. For a list of State Agencies that can provide you with further information about funding your education, please click here.
Prepaid Tuition Plan Benefits
- You lock in tuition at current in-state university rates, even if your child will not be attending college for several more years.
- It's an enforced savings plan.
- Prepaid Tuition Programs are often exempt from state and local taxes. Federal taxes are deferred and are not paid until the student actually uses the money. Then the beneficiary (the student) must pay federal taxes, but because the student's income is usually much lower then the parent's, the funds are often taxed at a much lower rate.
- Family and friends can often purchase Prepaid Tuition Units.
- Most states allow either lump sum payments or monthly installments.
- In certain states, the prepaid tuition can be used to cover other expenses such as fees, room and board, or books and supplies.
- The program can be beneficial to families who do not qualify for need based financial aid.
Warnings
You could be saving dollars that might be better invested in other sources. Some experts recommend investing in a diversified portfolio of mutual funds instead. Always weigh your investment strategy carefully.
- A Prepaid Tuition Program does NOT guarantee admission into college.
- Saving for college with a Prepaid Tuition Program could have a negative effect on federal financial aid applications.
- The Prepaid Tuition Program in most states is keyed to the price of tuition at the state's public, but not private, universities.
- If your student decides not to attend college, many states will only return the original contribution with a reduction or elimination of compounded interest.
Questions
Here are some of the questions you may want to ask:
- What schools participate in the plan?
- Is the plan locked into one school or can your child choose any one of the state schools?
- What if your child chooses a private university or an out-of-state public university instead of your state school?
- What if your child is not accepted at the state university you've been saving for?
- What happens to the money if your child doesn't go to college? Can shares be transferred to other kids in the family?
- What happens if your child is involved in an accident and can't attend college?
- How much can you invest? Is there a minimum? A maximum?
- What fees will you have to pay?
- What are the payment options? Is a lump sum required or can you make monthly contributions?
- Taxes- what is the taxable status for state & local taxes? How about federal? What's the tax rate when the money is withdrawn for use?
- What about tax deductions? Are the contributions tax deductible?
- Are there any residency requirements?
- Age requirements?
- What happens if the family moves from the state in which the student had planned to attend college, but the student does not?
- Exactly what expenses are covered? Just tuition? What about room & board? Books & fees? Travel expenses back and forth to school?
- Is the money guaranteed by the state?
- Can you make automatic payroll deduction payments?
- Can other members of the family or friends also make payments? Are contributions limited to parents?
- What if you want to withdraw form the plan? Are there cancellation penalties?
Savings Plan Trusts
Investment accounts that parents can use to build up tuition dollars for the future. Savings plan trusts are investment accounts in which parents may cultivate their children's education funds. Participants can make deposits of as little as $25 and these programs usually guarantee a minimum rate of return. One advantage to this type of college funding is the freedom to apply the savings to the students choice of college when he or she is old enough to participate in the decision.
Benefits
- Small deposits are accepted, often as little as $25 per month.
- The funds can be used at any accredited U.S. college or university.
- The Savings Plan may offer a higher return on the investment then a Prepaid Tuition Program.
- Savings Plan Trusts also defer federal taxes until the point when the funds are actually used.
- They are then also taxed at the beneficiary rate, which can be significantly lower then the parent's tax base.
- Many states offer tax benefits.
Warnings
A Savings Plan Trust, unlike a Prepaid Tuition Program, does not guarantee the current tuition rate regardless of a rise in those rates.
Some states have residency requirements. These states often require that either the participant or the beneficiary be a state resident when the student is first enrolled in the program. The states that do not have such a requirement are open to non-resident investors.
