Prepaid College Tuition Plans, What Are They All About

Prepaid college tuition plans are an investment in your child’s future higher education. Sometimes referred to as Prepaid Education Arrangements (PEAs), they make it possible for people to buy a portion (or all) of a public education plan that is sponsored by the state they live in. The plans can be purchased based on the prices for the present day, as opposed to the anticipated price for a future date.

The overall value of the investment for the prepaid plan is one that the state guarantees it will meet or exceed based on the inflation rate that is connected to tuition on a yearly basis. At the present time the in-state tuition inflation for most colleges is in the area of five to eight percent. The costs for the plan are not the same for everyone who applies and may be determined by the distance the student would be in relation to his or her college of choice.

Types of College Plans

Prepaid college tuition plans are broken down into two types. There is the units plan and the contract plan. A units plan makes it possible for you to purchase units of tuition (such as a set number of hours for credit). On the other hand, a contract plan allows you to buy contracts for a period of one to five years for the price of tuition. Regardless of which plan you choose, it is usually possible to contribute to either in instalments or to do so with a lump sum.

Advantages

There are two main benefits to these types of prepaid savings plans. First of all, they are guaranteed by the governments of the state to match any tuition increases that colleges impose. Secondly, they are considered to be a safe and low-risk investment for those who know ahead of time which colleges their children plan to attend upon completion of high school.

Disadvantages

There are some negative points when it comes to these types of prepaid plans. First of all, if you are not a resident of a given state then the plan is not generally available to you. These plans are often only available to those who live in the state where they wish to attend college and/or to alumni of state colleges.

The prepaid plans are meant for in-state public institutions. You may find that the principal on your money including the earnings is not enough to cover everything you require if you decide to go to a private college or one that is in another state.

If you decide to no longer contribute to the prepaid plan and want out then you could discover that you must deal with stiff penalties which might involve a cost to cancel the policy and in some instances, a loss of some of the interest you have earned to date.

College expenses are more than just about tuition and related fees. The problem with prepaid tuition 529 college savings plans is that they often only cover the bare minimum that students require when they begin college. For example, living in residence is often not factored in, nor is books, fees for courses, etc.

Prepaid savings plans for your son’s or daughter’s future have both an up side and a down side. It is important that you weigh both sides and then make the decision that is in your own best financial interest.