By Lauren Shipley
Director of Marketing
College Savings Plans of Maryland

Around this time of year families start to prepare for their recent high school graduate to go off to college. Some have looked at their financial aid package and breathed a sigh of relief because they saved, while others have gone into a state of panic.

Studies have shown that saving versus borrowing can cut the cost of college in half. 529 plans, tax-deferred vehicles for saving for college, can provide that sigh of relief for families willing to set goals to save for college.

Many do not realize there are two types of 529 plans: prepaid tuition plans and savings plans. A prepaid tuition plan allows you to pay a child’s tuition and fees in advance, with the intent of locking in today’s prices.

Sometimes prepaid plans can be hard to understand compared to the standard savings plan. So, let’s see if we can narrow down some of things you should consider.

First, paying in advance with a prepaid tuition plan, allows families to lock in for tomorrow at today’s rate. Typically, the investments in the prepaid plan are handled by the state and take the investment selection burden away from the family saving. And the value of the money is tied to tuition increases not market fluctuations. This can be advantageous to families who want to save for school, but are risk adverse. The assumption is the state works with an investment firm who handles the investment options. As an investor, though, be sure to read the disclosure statement for the prepaid plan’s investment policy. It is important to understand the types of investments and the allocation to each investment type. This will help you better assess how risky or conservative the prepaid plan is in their savings goals to make its contract payments to you. And many states have some level of guarantee on paying benefits which can add an extra layer of assurance.

Prepaid plans can also vary by state in how they function. In Maryland, account holders can use their benefits at an in-state or out of state school. If the student attends an approved in-state school the plan will pay the current tuition. Those students going to an out of state or private school receive an equivalent Maryland benefit calculation. However, not all states have as favorable approach to out of state schools.   Be sure to check with your home state. If you know your student has their sights on an Ivy League school, out of state provisions would be important to you.

Also, keep in mind a prepaid plan is not always flexible in paying for expenses aside from tuition and mandatory fees. Prepaid plans function more like defined benefit plans where they have earning goals and project future benefits. In order to set those projections there is a need for constants. Every student pays tuition and fees, unlike the endless variety of meal and living options, so often prepaid plans will cover only those costs. Some plans will allow for other educational expenses if there are scholarships, grants or tuition remission. That is another question to ask in your research.

Prepaid plans can be a good option for families, but like any investment, you need to do your research. You can learn more about prepaid plans here.


About the Author

Lauren Shipley is the Director of Marketing of the College Savings Plans of Maryland, which offers both a 529 prepaid tuition program and a directly-sold 529 savings plan. Together, the plans have more than 225,000 beneficiaries with investments of more than $5.1 billion as of March 31, 2015. Shipley currently serves on the Communications Committee of the College Savings Plans Network.