529 Prepaid Tuition PlansPersonal Finance
A normal 529 plan is a program that invests money for university or college. A prepaid 529 tuition program preserves financial costs by purchasing education credits. Students can use these educational credits in the future for college or university. As a result, you are essentially paying now for education later. Since college costs increase between three and six percent annually, paying your child’s college credits ten years in advance saves money. From the early 1980’s to 2010, college costs rose over 500% in real terms.
529 prepaid tuition plans do not involve savings or investment. You merely preserve today’s costs in the future and bypass the effects of inflation and rate increases. Buying college credit costs in advance is great if you have enough money to purchase them. The earlier you make the purchase the better since costs will have less time to appreciate. Avoiding 12 or 15 years of 4% or 5% annual increases in college tuition costs is much better than avoiding 2 or 3 years.
Public & Private 529 Prepaid Tuition Plans
Prepaid programs are typically state created and state controlled. They may only be open to residents in that state. It may be required your child attends an in-state university or college. Private universities may be accessible through the “Private 529 Plan”. This plan allows you to purchase future credits today but only for universities on the plan’s list. They usually allow conversion of a private 529 plan into a public 529 plan if you do not attend or fail to enroll at one of those universities. The Private College 529 Plan allows access to roughly 270 universities.
If you don’t attend a college or university approved by the 529 prepaid program, there are other options. You can typically receive a refund or rollover the prepaid 529 into a normal 529. You won’t receive the discount on college credit previously purchased and will pay full current expenses on educational course credit. To make matters worse, you lost the opportunity to invest this money in a normal 529 plan which would have compound returns until you were ready for college. To avoid these punishments, your child is restricted to selecting a university on the approval list.
These plans don’t cover all expenses associated with college. They only cover the tuition and certain fees. The plan and the university will list what you can use the money for. Normally you cannot pay for add-ons, room, board or non-educational expenses. You pay for these. You may have to use another savings program, such as a regular 529 plan, for these costs.
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