Purchase Future College Education with Section 529 Prepaid Tuition Plans - dummies

Purchase Future College Education with Section 529 Prepaid Tuition Plans

Prepaid tuition plans allow you to purchase future college tuition at current costs. The plans can be administered by a specific state or by an institution. The amount of money you put into your prepaid tuition account is guaranteed to buy as much tuition in the future as it would on the day that you put it in.

State administered Section 529 prepaid tuition plans try to ensure payback at a certain time. These plans carry several restrictions that Section 529 savings plans don’t:

  • Most plans carry restrictions as to who may participate. Usually either the owner of the account or the designated beneficiary is required to be a state resident when the account is established.

  • Most plans carry restrictions as to what colleges, universities, and community colleges are covered by the plan. Generally, the state schools are covered; tuition coverage at private colleges and universities within the state is spotty, and tuitions out of state can be problematic.

  • Many prepaid tuition plans cover only tuition costs. Room, board, and other fees have to be paid at the time your student is attending, from current income or other savings, like a 529 savings plan.

  • Most prepaid tuition plans have a limited enrollment/contribution period each year. If you plan on or are currently investing in a plan, don’t miss your window of opportunity.

  • The contribution limits for prepaid tuition plans are significantly lower than for Section 529 savings plans; if you’re attempting to use a 529 plan to transfer a lot of money to a designated beneficiary and to defer or avoid income tax on the earnings, the prepaid tuition option may not be the best option.

  • If you need to cancel the plan, fees are charged for terminating the account. Many plans limit the amount that you receive on cancellation to your contribution amount (less cancellation fees) or your original contribution plus some small percentage of income.

  • Distributions on behalf of the designated beneficiary currently are counted as being totally available to pay tuition, and thus may decrease financial aid eligibility.

If you know for certain that your child or grandchild is going to attend a certain school in the future, an institutional prepaid tuition plan may be just the ticket.

Since 2002, educational institutions have been allowed to offer their own prepaid tuition plans. These plans are essentially the same as state-run prepaid tuition Section 529 plans, except that individual institutions (or consortiums of colleges and universities) administer them and the contributions that you make are restricted to use at that particular college or university or that particular group of schools.

The rules governing these plans are the same as for the state-run plans. Contribution limits vary from school to school, depending on current tuition costs.

Like all other 529 plans, those administered by an educational institution are transferable; if your designated beneficiary decides to attend a different school, you can transfer your account to another plan administrator. In addition, if your designated beneficiary chooses not to attend school at all or receives some sort of free ride, you can make a tax-free rollover and name a new designated beneficiary, so long as the new beneficiary falls under the allowed relationship rules.