Parents Can Freeze College Costs With A Prepaid College 529 Plan

Prepaid Education Arrangements (PEAs), more commonly known as prepaid college 529 plans is available for parents to invest in their child's education. Parents may participate in prepaid college 529 plans and lock in the current yearly tuition rate. The current value is guaranteed by the state when the child begins school to meet or exceed tuition inflation, which increases each year by nearly eight percent. Costs for these plans will vary.

There are two types of prepaid college 529 plans. With a units plan, parents can buy units of tuition equal to one percent of the state's college tuition, or a specific number of credit hours. Parents who opt for the contract plan can purchase one to five years of tuition. The payment options are a lump sum or installment for the amount purchased in the contract.

Benefits of prepaid college 529 plans

Prepaid college 529 plans are a low risk way for parents to save for their child's college education. The investment is a safe option, especially if parents already know which college or university their child will attend. Also, state governments guarantee in-state college tuition increases.

Disadvantages of prepaid college 529 plans

Often, prepaid college 529 plans are restricted to in-state residents or state college and university alumni. Thus, the principle and earnings a parent has in the plan will not cover tuition and fees for a private or out-of-state college or university.

Investing in a prepaid college 529 plan will not produce the most interest for parents if there are five or more years before their child attends college. Once invested, parents must be committed to remaining in the plan or risk getting hit with stiff penalties, cancellation fees and/or loss of any interest gained.

Prepaid savings plans are treated as an asset, thus students may not be eligible for financial aid if the amount on the plan does not cover all expenses. Current financial aid formulas will calculate a percentage of the account's value into the Expected Family Contribution (EFC) for each academic year.

Another disadvantage of prepaid college 529 plans is the narrow definition of what is considered college expenses. Most plans only allow funds to be applied to tuition and fees. Parents and students will need additional funds for room and board (if the student plans to live on campus), course fees and books. In some cases with excess tuition units and scholarships, the funds can be used to cover additional expenses.

The rules and restrictions of each plan vary and are subject to change. Before enrolling, make sure that you have the most recent plan details.