By Michelle Winner, Public Relations and Marketing Program Manager, Maryland 529
July 3, 2017
While Prepaid College Tuition plans have been in existence for more than 20 years, there are several misconceptions that seem to discourage families from considering a prepaid plan as their college savings method of choice. If you think that a prepaid plan is just too expensive or too restrictive to consider, read on and you may be surprised by what you learn!
MYTH #1: A prepaid plan is not the same as a 529 plan.
A prepaid plan is indeed a tax-deferred, 529 plan. The main difference is that unlike a college savings plan, where your money is invested in an investment portfolio and subject to market fluctuations, a prepaid plan allows you to purchase tuition credits or certificates, at today’s contract cost, for future use. The value with a prepaid is the value of your contract is based on the rising cost of tuition vs. the stock market.
MYTH #2: A prepaid plan is too expensive.
While it is easy to let “sticker shock” influence your decision not to enroll in a prepaid plan, once you review your options, it may be more affordable than you think. Most plans offer the option of purchasing as little as one semester of university or community college, with options to purchase additional semesters or years down the road. (Keep in mind that if you purchase semesters or years afterward, it will most likely be at a higher rate.) If you want to purchase that 4-year university plan, you do not have to pay it all up front; you can choose a payment plan that works within your budget. The key is to start early. The younger your child is, the more time you have to pay for future tuition and, the sooner you lock in that contract rate, the more likely it is to cost you less than if you were to purchase that tuition years from now.
MYTH #3: If my child receives a scholarship or tuition remission, I’ll lose my money.
If you are fortunate enough that your child’s college tuition is covered by a scholarship, grant, or tuition remission, you have options on how to utilize the benefits in your prepaid plan. You can use the benefits to cover other qualified higher education expenses such as books, laboratory fees, and room and board. You may even be able to defer for graduate school. Most states allow you to change the name of the beneficiary to another sibling or family member. You can roll over the value to a 529 savings plan. Or you can choose to withdraw the money, but keep in mind there may be state and/or federal tax penalties on the earnings for withdraws for non-qualified expenses.
MYTH #4: My child must attend an in-state school.
While it is true that a prepaid plan is designed to “lock-in” the tuition of public colleges and universities in the state that offers the plan, that does not preclude your child from using prepaid plan benefits toward tuition while attending an out-of-state or private college. Check with your home state on the rules for using the plan at a private or out of state school. You can also look into a non-profit consortium called the Private College 529 plan that can be used at a list of private schools across the U.S. Keep in mind you may have a gap between what the plan pays and the out of state tuition.
Hopefully this has cleared up some of those misconceptions you may have had about prepaid plans. Just be sure to research your state’s 529 plan options as not every state offers a prepaid plan, and read the enrollment materials so you understand how the plan operates so you can make an informed decision that suits the needs of your family.
About the author:
Michelle Winner is the Public Relations and Marketing Program Manager for Maryland 529 which offers both a 529 prepaid tuition program and a directly-sold 529 savings plan. Together, the plans have more than 214,000 beneficiaries with investments of more than $6.1 billion as of June 30, 2017.