July 26, 2011

Pre-Paid Tuition 529 Plans

Many states give you the option of enrolling in a pre-paid tuition plan.   These are college savings plans that let you save money and then provide the full tuition when the beneficiary is college age.    The major benefit of these plans is that it takes the uncertainty out of saving enough for college and remove the worry that college costs will grow too fast for your savings to keep pace.

I think these plans are a great deal.  If your state has a pre-paid tuition plan then it is definitely worth looking into.

Here is a list of the states with pre-paid tuition plans and links to the individual state sites.

Alabama Maryland Mississippi Texas 
Florida  Massachusetts Nevada Virginia
Illinois Michigan Tennessee Washington

Plans in Colorado, Kentucky, New Mexico, West Virginia, South Carolina & Wisconsin are closed at least to new investors.

How Does it work?  

Generally the plans will require you to make an up front payment today of a certain amount and then promise you a year of tuition in exchange at a future date.    For example the plan may require you to pay the going rate of one years tuition today and then promise that this will get you a years worth of tuition in a future year.   The plans may have different variations on this.   You may buy 'units' that are a portion of a years tuition.  The current amount you pay may be based on some sort of formula rather than current tuition rates.    But for every plan the general system is the same : pay a certain amount today and get tuition in the future.

You CAN also go to out of state or private schools

No prepaid plan locks you into going to states public schools.   Every plan will let you go to an out of state or private college without forfeiting your money.  Most of the programs will pay out an amount equal to the rate of in state tuition at the states public schools.   They may use an average rate or the cost for the most expensive school.    Three states handle out of state or private schools differently :

Alabama - Actual tuition at other institution or amount equal to tuition in Alabama, whichever is less.
Massachusetts - Refund of principal and interest growth equal to inflation rate.
Virginia -The lesser of the principal plus actual rate of return or the in state tuition rate in Virginia.

Are they Guaranteed and Safe? 

Generally the plans are pretty safe.   Some of the funds are guaranteed by the states.    That doesn't mean they're 100% safe as there is always a small, remote chance that the state won't be able to keep its financial promises.   I'm generally not worried that state governments will start defaulting on their debts though.   A bigger concern I think is that the state may shut down its plan.   The plans could become underfunded over time and then the state may decide to shut down the plan.   What the state will do in the situation when it shuts down the plan may be documented in the details of the plan.  

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