Prepaid Tuition Plans

Prepaid tuition plans are one type of investment plan offered by certain states to pay for college. The way this type of plan works varies from state to state, but generally you pay money now to buy a college education in the future. The good part is that you pay the price of tuition as it stands today and you, in effect, have a contract with the state that guarantees that whomever you prepaid the tuition for will be entitled to attend college in the future. This allows the state to invest and use your money, while you get the break of paying for a future college education at today's prices.

Please note that the beneficiary of this type of plan still has to qualify for admission to the college of their choice. In other words, what prepaid tuition plans don't do is guarantee admission to college.

An excellent website to check is the College Savings Plans Network. This site gives you a great overview of the college savings plans and provides valuable state-specific information.

While the type of college savings plan offered depends on each individual state, if a state offers a prepaid tuition plan, there are some characteristics that the plans tend to share. You may be able to choose from prepaying tuition for a four-year state university or a community college, as well as prepaying dormitory costs.

Paying for a plan. States offer payment plans or lump sum payment options. Depending on the age of your child or grandchild (although, generally you can establish one of these prepaid plans for anyone, they don't have to be related to you), your payment amount will be different. You have to be 18 or over to be allowed to invest in a prepaid tuition plan for a beneficiary and you can generally begin contributing in the year that a beneficiary is born to when they are in 11th grade. In addition, you don't always have to be a resident of the state to which you are prepaying the tuition, although the beneficiary is generally required to have some tie to the state, whether they are a resident or lived in the state and then moved, etc.

Example Pamela and Tommy, residents of Florida, have one son, who was born in November of 1996. They have careers in the entertainment industry and their incomes are unpredictable. Pamela and Tommy decide to prepay the college tuition for their son just in case he wants to go to college and they don't have enough money to pay his way--they find it difficult to save due to their extravagant lifestyles. Under Florida's prepaid tuition plan they choose the four year university tuition program and have a choice of paying $76 a month until October of the year their son starts college, $162 a month for five years, or a lump sum of $7,664. They choose the lump sum payment because they have quite a bit of extra cash on hand at this point. In 2009, Pamela and Tommy decide to take their growing family and move back to California in order to revive their sagging careers. When their son graduates from high school, most likely in the year 2015, he will be able to attend a public university in Florida and his tuition will be paid for, no matter what it costs at that time. Under the Florida prepaid tuition program rules the fact that the beneficiary and his family moved out of state doesn't affect his payments or what is paid for him when he is ready to attend college.

What if your child doesn't go to college? You're probably thinking this all sounds well and good but wondering what happens if my child decides that they don't want to go to college? Would you lose all the cash you laid out for that prepaid tuition? The answer is no. State prepaid tuition plans generally offer refunds of the amounts paid without interest if your child doesn't go to college. In situations such as death, disability, or if your child receives a scholarship for college tuition, you can often not only get a refund, but interest (although it's usually at a pretty low interest rate) as well.

Private schools. OK, you're thinking, my kid is going to college one way or another. But what if your child decides to go to a private school or a school outside the state? Are you limited to a refund of the prepaid tuition? You may be surprised to learn that prepaid tuition plans can often be used for private schools as well as different types of out-of-state schools. While the payments made may not cover the same thing you paid for at the schools included when you signed on, the prepayments may still cover quite some ground when it comes to tuition.

Tip We know it's impossible to predict the future, which is essentially what you're trying to do when you invest in a prepaid tuition plan. So even if you're sure from the date of his birth that your son will attend the same school you and your father attended or that your granddaughter will attend your alma mater, life has a way of throwing us curveballs, especially when it comes to predicting what children will do! Therefore we would like to urge you to look for flexibility if you choose a prepaid tuition plan so that you get the most for your education investment dollars.