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Prepaid tuition plans, the original state-sponsored 529 programs, allow you to pay tuition in advance and lock in the cost based on today’s tuition prices. Private colleges are also now allowed to sponsor 529 prepaid tuition plans.
With a prepaid tuition plan you don’t choose your investments as you do with a 529 college savings plan. These plans pool your contributions with the contributions of other participants. They then make long-term investments with the goal of keeping pace with tuition increases in the state.
When your child is ready to go to college, the plan transfers funds directly to the institution to cover the tuition.
Some states back their prepaid tuition plans with a full-faith-and-credit obligation or statutory guarantee. Therefore, the state’s Treasury is obligated to make up any difference in investment returns and future tuition bills. Some states, however, don’t provide this guarantee.
Prepaid plans were originally designed to pay for tuition at public universities within the sponsoring state. You can now also use savings in these plans for tuition at any eligible public university or private college in the country. The tuition amount paid, however, is based on tuition costs at a state’s public universities.
Therefore, if your child doesn’t attend an in-state school and there’s a difference between the prepaid tuition plan price and the current out-of-state tuition cost, you’ll have to pay the difference.
There are two main types of prepaid tuition plans – prepaid unit plans and prepaid contract plans. With a unit plan you buy units that represent a fixed percentage of tuition. With a contract plan you buy a specified number of years of tuition and sometimes room and board.
You pay for amounts of tuition in monthly installment payments or a one-time lump-sum purchase. The price is based on the type of plan, the child’s age, the current and projected cost of tuition, and the projected rate of return.
Some prepaid plans are only open to state residents. The maximum contribution for prepaid plans is the amount necessary to prepay the number of years or units of tuition offered by the state.
Most prepaid plans have some age or grade beneficiary restrictions. Many require beneficiaries to be under age 18 or below the 8th, 9th, 10th, or 12th grade at the time the contract is purchased.
While prepaid plans help you save for college expenses, they don’t guarantee college admission; students still have to meet a college’s entrance requirements.
If your child doesn’t attend college you can transfer the plan to a qualified family member. If you don’t transfer the plan to a sibling or you need to cancel the plan, most plans will return the amount of your original contributions with a reduction or elimination of any interest earned, and typically minus a cancellation fee.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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