Is a Pre-Paid Tuition Plan Right for You?

There are plenty of ways to save for college. The traditional savings account or CD may work for some. But what about a prepaid tuition plan? Probably you've never heard of this option; read on to discover how it works and if this is a suitable option for you.

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Understanding the Prepaid 529 Plan

Because of rising costs and inflation, college tuition grows more expensive for each generation. If you're a parent with a brand new child (or maybe one on the way), you've likely thought about how you could save for his or her education. Consider investing in a prepaid 529 Plan to secure your child's future education.

A prepaid 529 plan, or a prepaid tuition plan, is a state program that allows parents to pay off their child's tuition now. Current tuition rates are locked in, and no matter how much costs climb, your student won't have to pay more. Each state offers these plans, but some have restrictions, such as a limit to public schools or in-state colleges only.

The Scenario

Congratulations on the birth of baby Johnny! Presents are coming in at an alarming rate, and grandma has given you a nice check to open up a savings account in his name. After talking it over with your spouse, you've both decided that any money you received as gifts should go toward a college fund. After all, you're both still paying off your debts. Your sister-in-law tells you about a prepaid tuition plan that she has invested in for your niece. Should you consider investing in one yourself?

How It Works

Researching savings accounts and CDs can get overwhelming. If you're considering a prepaid tuition plan, you must investigate your state's plans carefully. There are two primary types of plans - where you buy a unit (such as a semester) at a time and can purchase as many as you like, or where you sign a contract agreeing to pay for however many years of college you think Johnny will attend (two or four years, typically).

This money is tax-deductible, low-risk and is considered one of your assets - so it will not affect Johnny's financial aid package. When you decide to sign up for the program, you'll choose how many semesters you'd like to pay for (2-year or 4-year program). Based on that and your child's current age, the program will set up a payment plan.

The Risks

The economy is constantly shifting, and some state plans may lose their value or actually run out of money. Plus, there will always be additional school costs. Many states don't offer plans that cover room and board. And meal plans and books add up.

Talk With Johnny

Let Johnny know about this program as soon as he's old enough to understand it. With restrictions, he may feel let down that he needs to stay in-state for his education. He may also resent the fact that he must attend a public school, so talking early will allow him to think within the limitations.

These restrictions could also pose a problem for his major. Not all public schools offer an engineering degree, for instance. It may be a good idea to keep up-to-date on local college course offerings. This way you can encourage Johnny in his choice while guiding him toward a college that fits the prepaid tuition plan limitations. If Johnny doesn't attend college within 10 years after graduating high school, some states require that the plan can be transferred to another family member or canceled. So be sure to discuss when he should attend university as well.

So now you need to consider public colleges. Check out our picks for the ten best values in public schools.

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