Do you know exactly where you or your beneficiary will attend college? Do you wish you could lock in today’s rate for tomorrow’s degree? If so, a prepaid tuition plan may be right for you.
This plan allows the saver to purchase units or credits at a participating college (usually public and in-state) at current prices. Those credits can then be applied to future tuition and mandatory fees.
There are a few caveats, of course. For starters, if the beneficiary decides not to attend the college in question or another participating institution, they can withdraw the money but may face tax consequences as a result.
Prepaid tuition plans may also be subject to residency requirements, meaning the saver may have to reside in the same state as the university the beneficiary plans to attend.
Also, the federal government doesn’t guarantee the plans, although some state governments do. As a result, a certain level of risk is involved: You may lose some or all of your money if the plan’s sponsor has, as the U.S. Securities and Exchange Commission puts it, a financial shortfall.
Prepaid tuition plans are great if you have your sights set on a particular higher educational institution as well as a few years to let your investment grow. They’re less great if you plan to use the money for expenses like room and board or K-12 education, none of which are eligible expenses for prepaid tuition plans.