PREPAID TUITION PLANS
Prepaid Tuition Plans are offered by individual states. Prepaid plans are similar to 529 plans. They allow parents to pay tomorrow’s tuition costs at todays prices. Tuition can be prepaid by the year or by the credit hour, depending on the contract, and the equity one acquires won’t diminish, even if costs increase tenfold by the time the child is ready to start college.
Federal tax must be paid when the plans are redeemed, but proceeds are taxed at the child’s rate. Plans often are exempt from state and local taxes. While funds from prepaid plans often can be used in other states or applied to private school tuition, some schools will not guarantee that increases in costs will be covered. Also, contributions to prepaid plans reduce a student’s eligibility for financial aid. If a child decides not to attend college, parents will be refunded their contributions. In some states, you will not get back any interest that may have accrued and you may be charged a cancellation fee.
How do you go about checking into a prepaid tuition plan? You could call the school you are interested in or an investment firm you are interested in. I have linked to T. Rowe Price which offers prepaid tuition mutual funds, but I'm sure all the big investment firms now have such products.
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