By Mary Morris
CEO, Virginia529 College Savings Plan
February 1, 2016
Last week I received an email from a mother with prepaid college tuition contracts for two sons, born a year apart. In her note, she said when her older son started college in 2011 and her second son in 2012 (both attending state schools), “I knew there were no impediments to their education. I tell people, I almost kissed the computer when their tuition bills would disappear! Thanks. For me, among all the stresses of life- Virginia529 was peace of mind.”
This is my favorite kind of correspondence and speaks to how prepaid 529 programs are helping families. If you or your intended beneficiary lives in one of the 11 states which offers a prepaid 529 program or you’re planning to save for a private college or university, a prepaid tuition program should be on your “to research” list.
With the same tax advantages and flexibility as the savings account type of 529 which are offered in almost every state, a prepaid program helps many families interested in finding a hedge against tuition inflation as they prepare for future higher education costs. Families choosing the prepaid version of a 529 plan like knowing that their investment will provide a defined benefit, depending on how the account is applied in the future.
If you’re already considering a prepaid tuition program, you’re probably attracted to the ability to pay for semesters or credits in advance and lock in the defined benefits of a prepaid program, which vary from state to state. Unlike most savings programs, most prepaid programs (with the exception of the Private College 529 Plan) have residency restrictions for participation. As with all investments, whether prepaid or savings, be careful not to “set it and forget it”, thinking all your planning is complete when you acquire a prepaid account or contract.
A Healthy Plan Anticipates All Expenses
During planning (and definitely before patting yourself on the back when the prepaid contract is paid in full), families should ask themselves one important question: have we prepared for other costs, like room, board, and books, associated with my child’s or grandchild’s higher education expenses? Starting a 529 savings account in addition to the prepaid account can help prepare for those additional costs.
Special Strategies for Prepaid Savers
Families selecting a 529 prepaid program may benefit from different planning and preparation strategies than those enrolling only in a 529 saving programs. Here are a few tips to keep in mind:
- As far in advance as possible: Open a 529 savings account for costs not covered by your 529 prepaid account, which are typically limited to tuition and mandatory fees.
- Two to three years before the child intends to use the account: Contact your 529 plan to remind yourself of the program’s details and benefits coverage.
- One to two years before college enrollment: Ask the 529 plan how prepaid benefits apply to the universities and majors high on your child’s preference list. Are the benefits different for a public or private school? What fees and charges are included in the defined benefits (often course- or major-specific charges are not covered).
- Two to six months before starting classes: Inform the 529 plan of the school your child will be attending and confirm final details of coverage. Typically, a prepaid program makes all payments directly to the institution directly, so make sure your program has all pertinent information to make those payments correctly!
Prepaid tuition programs give peace of mind to families looking to manage higher education costs. With careful planning both at the beginning and near the end of the saving journey, families can successfully reach their college goals.
About the author:
Mary Morris is CEO of Virginia529 College Savings Plan. In addition to directing the operations, resources and investments of Virginia529, Mary advocates for state and federal legislative and governance issues relating to the 529 industry as chairman of the board of the College Savings Foundation. She’s also actively involved in the College Savings Plans Network and the National Association of State Treasurers Legislative Committee. A tax, securities and bond expert, Mary also was Treasurer of Virginia. With more than 2 million accounts and $54 billion in assets under management as of December 31, 2015, Virginia529 is the largest 529 plan available.