The Good and Bad of Prepaying College Tuition

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There are so many great things about college. Fantastic professors teaching marvelous subjects at outrageous prices. 

Okay, so maybe not all of the things about college are great. Especially the price tag of tuition these days. And it only looks like those costs are going to increase for the foreseeable future. 

Luckily, there are a lot of great ways to save for your child’s college tuition without having to rely on student loans or piggy banks. One of the most common ways to save is through a 529 prepaid tuition plan.  

But they aren’t perfect for everyone. How do you know if prepaying college tuition is right for your? 

Let’s look at the good and bad of prepaying college tuition. 

The Basics:

  • Prepaid college plans allow you to buy a percentage of the year’s tuition in advance, and lock in rates for when your child goes to college later. 
  • Prepaid tuition plans are available through your state or the Independent 529 plan, which is run by a group of private colleges. 
  • The account owner or beneficiary needs to live in the state where the plan is opened.
  • Anyone can contribute. 
  • You’re basically buying future college tuition at today’s prices, and protecting yourself against the increase of college expenses.

The Good

  • Your investment is protected against another recession, tuition explosion, and anything else that could make it harder to pay for college. 
  • You won’t be paying regular rates on college tuition. If you buy a year’s worth of tuition today, and your child goes to school in 10 years, you’ll be paying today’s rates for 2029’s college. That could be a huge savings. 
  • And you’ll know ahead of time just how much college you’ve paid for when it’s time to enroll your child. 
  • You don’t have to make investment decisions. 
  • It encourages you to save for your child’s college future. In fact, it kind of forces you to do it. 
  • Your kid will go to school close to home, since they need to go to a state school. 
  • State schools mean you save more anyway. 
  • A lot of states have default guarantees in their programs, so you can rest easy knowing your money will be there. 
  • There could be tax breaks involved.

The Bad

  • If you invest the money yourself, you could probably get a better return. 
  • Not every state has a 529 prepaid plan, and only about 300 private colleges participate in the Independent 529 plan. If your child wants to go somewhere else, you won’t get the same kind of return on your investment. 
  • You’ll have less control over contributions, and may have to keep making contributions even when money’s tight. 
  • Prepaid tuition plans cover tuition and mandatory fees. Only some 529 programs cover additional school costs like books, supplies, parking passes, room and board, etc. 
  • You have to trust the state to invest your money competently. And that’s a lot of trust to put in the government. 
  • There may be age and residency limits on your kid to use the plan. So taking that gap year to backpack around Europe might not be a great idea. 
  • Prepaid plans are more complicated to enroll in that a regular 529 savings plan. 

So Is It Right For You?

That depends on a couple of things. First off, does your state even offer a 529 prepaid plan? Not all states do, and after the last recession, some states shut their programs down. So start by researching the options provided by your state. If your state offers a 529 prepaid program, look into the specifics, and consider sitting down with a financial advisor to see if you meet the requirements and if the rules would work well for you. 

If your state doesn’t, or if your child (or you) has their heart set on a private college, look into the Independent 529 prepaid plan. Again, take a hard look at the rules and regulations and see if it’ll work for you. 

If you have experience with investing, creating your own college fund that you invest in on your own might be the smarter option, as you might get more return on your investment than with a prepaid plan.

So it really depends on you and your specific situation. But now at least you know the good and the bad about prepaid college plans. 

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