If you have any familiarity with college savings, you’ve most likely heard of 529 plans. These tax-advantaged plans were created to encourage families to save for college.
While most people are familiar with 529 savings (or investment) plans, prepaid 529 plans are lesser-known. Despite this, they’re a powerful college savings option more families should know about.
In this article, we review the basics of prepaid 529 plans, how they are structured, and reasons why opening a prepaid plan might be right for you.
What is a prepaid 529 plan?
A prepaid 529 plan (sometimes called a guaranteed savings plan) allows you to save for college by prepaying all or part of tuition and mandatory fees at a predetermined rate.
Unlike traditional 529 plans, where your savings are invested and exposed to normal market conditions, prepaid 529 contributions, usually in the form of tuition certificates or credits, are guaranteed by a state or participating colleges. When your child is ready to attend college, the plan pays tuition at the current rate. For this reason, prepaid plans are a great way to save for college while protecting against tuition inflation.
Since most of these plans are offered by states, the prepayment typically applies to in-state colleges and universities, although in most cases funds can be used outside the network of colleges. More on that later. An exception to this is Private College 529 Plan, a prepaid tuition plan at nearly 300 private colleges and universities nationwide.
How does it work?
Generally, prepaid 529 plans are structured in two ways: contract and unit.
With contract plans, you choose how many semesters or years of college you want to save for (typically up to 4 years) and agree to pay a set amount each month as part of your contract. How much you pay is based on several factors but typically includes your child’s age, the number of years you save for, and projected future costs.
Let’s look at a saving example for a popular contract plan, the Florida prepaid plan. Let’s say you want to save for two years of tuition and fees at a state college in Florida. Assuming you meet the eligibility criteria, like Florida residency, you could open an account and begin saving. Since this is a contract plan, you can quickly determine a monthly payment. For example, according to the Florida prepaid website, for a newborn child born in March 2023, your monthly contribution would be $53.70 for 233 months (or payments) to save for two years at a Florida college. In the end, you will have saved two years of tuition and most fees, and prepaying would allow you to spread out savings over multiple years.
Unit plans work a little differently. Your contributions are buying fractional units, redeemable in the future. The return is typically based on the average tuition rate increase at participating schools. An example is the Washington Guaranteed Education Trust. With this plan, the state of Washington guarantees that if you buy 100 units today, your 100 units will be worth the actual cost of one academic year of resident undergraduate tuition and state-mandated fees at the most expensive Washington public university when your child enrolls in college, regardless of how much tuition has increased over time.
Although structurally different, both types of plans have the same premise: pay now and keep up with tuition inflation.
When does prepaid tuition make sense?
There is no one size fits all for college savers, but you do have options. If you are considering a prepaid 529 plan, there are certain scenarios where it could provide a real benefit. Consider the following:
- You are seeking downside protection. A primary advantage of prepaid 529 plans is downside protection. As previously mentioned, contributions are not invested like traditional 529 savings plans, meaning your exposure to market volatility is minimal. Since your prepaid tuition is keeping pace with tuition inflation — versus relying on market returns — this takes some of the guesswork out of planning for college costs.
- You have a college in mind. If you have a good idea where your child wants to attend college, prepaid 529s offer a unique advantage. For example, let’s say your child hopes to attend a state school in Michigan. Your best bet might be opening an account with the Michigan prepaid plan. Or maybe your child has their sights set on private college. You may want to explore Private College 529 Plan, which has nearly 300 participating schools nationwide.
- You are looking to diversify your college savings portfolio. Many families treat prepaid 529 plans as the fixed income portion of their college saving portfolio, providing guaranteed prepaid tuition with little market risk.
Where can I find a prepaid 529 plan?
Currently, there are 9 states accepting new applicants and one nationwide plan focused on private college affordability.
Florida
Florida Prepaid is a contract plan. Families can choose from multiple plans and payment options starting at $45 per month, available for 2 or 4-year state colleges. Beneficiaries must be in 11th grade or younger at the time of enrollment and be Florida residents. Payment amounts are based on the student’s age and selected plan. Florida Prepaid offers a housing option, and unused contract benefits may be used for graduate level tuition. The out-of-network value equals the same value that would have been paid to a Florida school, and the refund value equals payments into the plan minus fees, withdrawals, or refunds.
Maryland
Maryland’s Prepaid College Trust is available to Maryland and DC families. The plan offers multiple contract tuition plans and payments options, starting at $44 per month. The plan is open to newborn through 12th grade, and beneficiaries must be enrolled for at least 3 years before they are eligible to receive tuition benefits. The out-of-network value is actual tuition each semester up to a maximum of one half of the weighted average tuition or your minimum benefit (whichever is greater).
Massachusetts
The U.Plan is available for roughly 70 public and private colleges in Massachusetts. Contributions buy tuition certificates that purchase a portion of tuition and fees at a network of colleges and universities. Upon redemption, tuition certificates will cover the same percentage of tuition and fees purchased. Families can redeem certificates after 5 years, and the minimum contribution is $300 each year to purchase a certificate. The out- of-network refund is your initial investment back plus interest compounded at the annual consumer price index. The plan has no state residency requirement, and although it’s not technically a 529 plan, it’s structured very similarly.
Michigan
The Michigan Education Trust (or MET) is a contract plan for Michigan residents. MET offers two university plans — full benefits and limited benefits — and one community college plan with multiple payment options, including lump sum, monthly purchase, and pay as you go. If a student attends an out-of-state college or receives a full-tuition scholarship, refund payments will be based on the average or lowest tuition at Michigan public colleges or universities, depending on the selected plan.
Mississippi
The Mississippi Prepaid Affordable College Tuition Plan (or MPACT) is a contract plan available to Mississippi residents. The plan offers 8 different savings options that range from 4-year university to 1-semester community college, starting at $16 per month. The plan is open to newborn through 12th grade.
The amount of a refund is based on the current cost of in-state tuition and fees at the Mississippi public institution a beneficiary is attending, or the weighted average tuition and fees at Mississippi public institutions if the student is enrolled at a private or out-of-state institution.
Nationwide
Private College 529 Plan is a prepaid tuition plan that functions like a unit plan. Account owners lock in a percentage of tuition and fees — in the form of tuition certificates — for nearly 300 private colleges and universities nationwide. The amount of tuition purchased is based on the current rate of tuition at each participating school. The percentage of a year purchased will vary by school, based on the tuition rates for the academic year in which your certificates are purchased. The redeemable value is based on how long you have held tuition certificates and the increase in tuition and mandatory fees. The out-of-network value is based on the amount contributed, adjusted for the net performance of the program trust, subject to a maximum increase of 2% per year and a maximum loss of 2% per year, compounded annually. This plan is open to anyone, with no residency requirement.
Nevada
The Nevada Prepaid Tuition Program is a contract plan for Nevada residents. The plan allows residents to purchase a contract for a specific number of either college or university level higher education credit hours at a locked-in contract price, and pay for that contract over an extended period. The beneficiary must be in 9th grade or below and 18 years old or younger at the time the contract is purchased. Contract benefits may be used at any eligible educational institution nationwide. However, the cost of credit hours the plan will pay to any private or out-of-state college or university will be no more than the plan would have paid to a Nevada school under the contract purchased.
Pennsylvania
The PA 529 Guaranteed Savings Plan (or GSP) is a unit plan, and contributions purchase tuition units. Their value increases over time to track average tuition increases in one of several school categories selected by the account owner. There is no minimum initial contribution and prices change each year on September 1.
Families can take a refund one year after contributions are credited to their account. The value equals the growth you would have received had you used your account for education, or the growth the GSP Fund achieved on your contributions, but not less than the contributions made, minus any fees.
Texas
The Texas Tuition Promise Fund is a unit plan. Account owners select one of three unit types: Type I: 100 units represent 1 academic year at the most expensive Texas public college or university; Type II: 100 units = 1 academic year at the weighted average cost of a 4-year public college or university; Type III: 100 units = 1 academic year at the weighted average cost of a 2-year public college or university. Tuition unit sale prices are based on the current academic year costs at eligible Texas public colleges and universities. Families must purchase at least 1 unit to establish an account plus a $25 application fee. The out-of-network value is contributions plus earnings if used for a private or out-of-state institution.
Washington
Washington Guaranteed Education Tuition (or GET) is a unit plan. Families can purchase anywhere from 1 to 800 units per student or partial units. 100 GET units equal one year of resident, undergraduate tuition and state-mandated fees at Washington’s most expensive public university. You can add units all at once, over time, or through monthly payments. Units must be held for two calendar years before they are eligible for use. The out-of-network value is the monetary value of GET units and can be used at any institution.
Of the ten plans, eight have residency requirements, meaning the account owner or student must be a resident of the state offering the prepaid plan. Exceptions are the U. Plan in Massachusetts and Private College 529 Plan.
What else should I know?
Here are some additional questions frequently asked about prepaid 529s:
Are prepaid plans only available for tuition and fees?
Yes. Prepaid 529 plans allow you to lock in and save for tuition and fees only (recently, some plans like Florida allow you to prepay room and board). Although you can use funds to pay for other qualified expenses, typically the best use of funds is for tuition and mandatory fees. Since there are additional costs associated with college, like room and board, many families save in both a traditional 529 savings plan and a prepaid 529 plan.
What happens if my child attends college outside of the network of schools I was saving for?
Although prepaid plans were designed to pay for costs at certain colleges and universities, the funds are portable and can usually be transferred (or refunded) to use at an out-of-network college, meaning you can use the monetary value of the prepaid plan to cover costs at any college. The redemption (or value) of your prepaid funds at those out-of-network colleges will vary based on the terms of each prepaid plan.
Are there tax advantages with prepaid 529 plans?
Yes. Like traditional 529s, prepaid 529 plans offer the same great tax benefits that make saving in a 529 an attractive option. Contributions are made with after tax dollars and grow tax-deferred, and withdrawals are tax-free, assuming clients use funds on qualified education expenses. Plus, depending on the state, there may be additional income tax deductions or credits for contributions. See more on the tax benefits.
I heard saving for college could impact eligibility for financial aid. Is that true?
The short answer is yes. Savings of any kind could impact financial aid eligibility. However, the impact is minimal. A prepaid 529 account owned by the parent of a dependent student (which is how most are structured) is reported as a parent asset on the FAFSA and CSS Profile. Since parent assets are factored into financial aid formulas at lower rates than student assets (no more than 5.6% for the FAFSA and 5% on the CSS Profile), the overall impact on financial aid eligibility is small. And, based on recent legislative changes, there are slated to be even more benefits for non-parents who want to open a prepaid 529 account for their grandchildren or nieces or nephews.
Sources:
Saving for College: https://www.savingforcollege.com/article/prepaid-tuition-plans
CollegeWell: 529 Plans 101, https://www.collegewell.com/collections/529-plans-101/
College Illinois: https://www.collegeillinois.org/AboutCollegeIllinois/program-updates.html
Saving for College: Prepaid Tuition Plans, https://www.savingforcollege.com/article/prepaid-tuition-plans
College Savings Plans Network: What is 529, https://www.collegesavings.org/what-is-529/
Washington GET: https://wastate529.wa.gov/
