Prepaid Tuition Plan: Which States Offer Them?
Aug 17, 2022 By Susan Kelly

Prepaid tuition plans are an appealing choice for families that have a long way to go in paying for higher education. These arrangements enable individuals to make payments on future tuition at what is likely to be cheaper rates. However, such schemes are now very uncommon. As of the year 2020, just nine states will still provide them, down from the previous high of 22. Here is a breakdown of the many prepaid tuition packages that are available, along with information on where you could possibly acquire them and whether or not you should consider using them.

The Definition of a Prepaid Tuition Plan

A 529 plan may also be used as a prepaid tuition plan. They make it possible for parents of students, grandparents, or other relatives to pay for their college education at today's prices, even if the student won't start school for many years. The funds from a prepaid tuition scheme may be spent at any of the schools or institutions in the state that offers the programme. Additionally, they may provide some kind of reimbursement for attending a private or out-of-state university. The monies in the plan are pooled and invested with the goal of earning a return faster than the rate of inflation in public university tuition. In exchange for the guaranteed tuition rate, you are basically lending your funds to the state's program. You have the option of making payments over time or making a single large payment.

Only if you know for sure that the student will attend a public university inside the state should you choose a prepaid plan. While many plans may allow for out-of-state college expenses to be covered, often, there is a penalty associated with doing so, and the plan may not be able to pay the whole amount. Timing & age are also important considerations for these schemes. The typical minimum time period for receiving the funds is three years. When the account is created, the beneficiary's age must be no higher than 15 years old. Not all costs, such as food and lodging, may be covered by your account.

What's a Tuition Guarantee?

The cost of attendance at certain universities remains stable regardless of how many years a student chooses to attend. Guarantees of this kind often do not cover living costs, such as food and housing. Since the cost of higher education steadily rises each year, tuition guarantees are a financial boon for students. More accurate educational planning is made possible by tuition guarantees because of the stability they provide in terms of financial outlay. Each institution has its own requirements and criteria for participation. Typically, a school will guarantee your tuition for four to five years. These assurances are valid only for degree-seeking students. Guaranteed tuition recipients at certain institutions must keep up a minimum GPA or number of credits.

Almost 120 colleges and universities in the United States provide such assurances to their students. These assurances are typical at public institutions since they are often required by law. It is possible to get tuition assurance details on the websites of several institutions. To get the most up-to-date information, however, students should contact their respective institutions directly.

What States Provide Prepaid Tuition Plans?

Prepaid college tuition plans are now available for new students in the nine states shown in the table below. It is important to keep in mind that there is substantial variation between the plans with regard to guarantees, residence criteria, and other aspects.

  • Florida
  • Texas
  • Mississippi
  • Maryland
  • Massachusetts
  • Michigan
  • Nevada
  • Washington
  • Pennsylvania

Comparison of College Savings Plans and Prepaid Tuition Plans

There are other options for parents to save money than prepaid tuition plans. To help families save for their children's higher education costs, states provide a variety of additional options. The second major sort of 529 plan is used to save money for higher education expenses. There is no guarantee that the plan will cover any beneficiary's future education costs; rather, it provides a way to set aside money for elementary through high school tuition payments. Money from this source may be used for approved higher education expenditures such as tuition, fees, housing and board, books and supplies, and other similar expenses. Account holders get to choose how their money is spent.

Many states provide their own 529 programs for college savings, with the exception that the funds may be spent at institutions located in any of the 50 states. In the event that the beneficiary of a 529 plan no longer attends college, the account holder (usually the student's parent) has the option to either transfer the funds to another family member or take a distribution, subject to income tax and a 10 percent penalty on profits. Prepaid tuition plans may allow you to alter the beneficiary or return your donations, but not profits.

Explain the concept of a "prepaid tuition plan."

To put it simply, they are a form of 529 plan that enables members of the family (such as mom and dad, grandparents, and other close family members) to save for a kid's future college expenses at today's rates, regardless of when the youngster actually enrols in school. The funds from a prepaid tuition scheme may be spent at any of the schools or institutions in the state that offers the program.

Conclusion

If you want to start saving now for your child's college education, a prepaid tuition plan is a good alternative. They provide tax benefits and a way to save for future education expenses by locking in today's prices. Only nine states offer this alternative. You can only use the funds for tuition at an in-state school if you reside in one of the above states, and they can't be used for anything else. If you're undecided, you may always select a college savings plan or the federal Private College 529 Program.