What Is A prepaid Tuition Plan?

College prices rise 2-4% annually due to many factors, including inflation. This means that each generation pays more for college. Some parents or guardians offset this trend by investing in prepaid tuition plans. But what is a prepaid tuition plan? How does it work? This page answers those questions.

Essentially, prepaid tuition plans secure future education units or credits at current tuition rates. The invested money retains its original value if used at qualifying institutions.

Only nine states have colleges with prepaid tuition plans. These plans appear most often at public state schools. Some private institutions offer prepaid tuition plans. Colleges offering prepaid tuition plans include the University of South Alabama, the University of Southern California, and American University. Smith College and Chicago State University also offer prepaid tuition plans.

Read on to learn about prepaid tuition plans, tuition guarantees, and 529 college savings plans.

What Is a Prepaid Tuition Plan?

A prepaid tuition plan is a type of 529 plan. It allows parents or guardians to save money for their children's future college tuition. These plans allow purchasers to buy units or credits at today's dollar values. This helps students save money since the invested money does not lose value over time with inflation. Purchasers can buy prepaid tuition plans through installments or one-time payments.

The full value of prepaid tuition plan credits often only count toward tuition and fees at public state schools. State governments may sponsor prepaid tuition plans and grant them to state residents only. But some private organizations offer prepaid tuition plans. These plans invest a person's money but still guarantee their payout at current in-state tuition rates.

Earnings grow at a tax-free rate. Withdrawals remain tax-free when used for qualifying educational expenses. Prepaid tuition plan purchasers may also receive tax deductions or credits. If a child does not need college funds, the prepaid tuition plan credits can transfer to another child in the same family.

What Is a Tuition Guarantee?

Some colleges guarantee students the same tuition rate for each year of enrollment. These guarantees often do not extend to non-tuition expenses such as room and board. Tuition guarantees save students money since college tuition rates increase yearly. By providing more predictable costs, tuition guarantees also allow for more precise education budgeting.

Eligibility and program specifications vary by school. Most schools provide tuition guarantees for 4-5 years. Only degree-seeking students qualify for these guarantees. Some schools require students who receive tuition guarantees to maintain a certain credit load.

Nearly 120 schools in the U.S. offer tuition guarantees. Often legislatively mandated, these guarantees appear most commonly at public colleges and universities. Some schools list tuition guarantee information on their websites. But students should contact schools directly for information.

How Does a Prepaid Tuition Plan Work?

Each state has different prerequisites and steps for enrolling in prepaid tuition plans. However, in many states, any adult U.S. citizen or legal resident with a valid Social Security number can open a prepaid tuition plan. Many plans announce new pricing during an annual open enrollment period.

Participants complete an application, which may include an application fee. Friends or family may contribute to the plan by providing the prospective student's account number and name.

If the student receives scholarships or grants that cover some or all tuition costs, the plan purchaser can transfer the funds to the student's younger sibling. If no one uses the funds, the prepaid tuition plan refunds the purchaser the original dollar amount, minus interest earned. Some plans charge a cancellation fee.

What Is the Difference Between a Prepaid Tuition Plan and a 529 Savings Plan?

Both 529 savings plans and prepaid tuition plans can help purchasers save money on educational expenses. Plan purchasers and recipients do not pay federal income taxes on withdrawals for qualifying educational expenses. Prepaid tuition plans allow purchasers to prepay tuition expenses at participating colleges. A 529 savings plan may cover K-12 or college tuition. The 529 savings plan invests the purchaser's funds and does not guarantee investment return. The prepaid tuition plan guarantees invested funds.

Learn more about prepaid tuition plans vs. 529 savings plans below.

What States Offer Prepaid Tuition Plans?

According to Forbes Advisor, parents, guardians, or grandparents can open an account for a prospective student. They can do so even if the student lives out of state. State-sponsored prepaid tuition plans typically appear in tiers based on the prospective school's cost.

Purchasers can choose between plans for inexpensive, moderately expensive, and expensive schools. Some plans allow more school choices or more flexibility to switch colleges. Some plans allow purchasers to cash out part of their contribution for use at out-of-state or private colleges. The cash-out amount may match the tuition cost at the original state college tier.

See below for some states that offer prepaid tuition plans. Students who want to attend a private college may benefit from the Private College 529 Plan. Learn about this plan in the following section on private college tuition plans.

States With Prepaid Tuition Plans:

• Florida Prepaid College Plan
• Maryland Prepaid College Trust
• Michigan Education Trust
• Nevada Prepaid Tuition Program
• Mississippi Prepaid Affordable College Tuition Program
• Massachusetts U.Plan Prepaid Tuition Program

Additional Plans:

• Pennsylvania Guaranteed Savings Plan
• Washington Guaranteed Education Tuition
• Texas Tuition Promise Fund
• Private College 529 Plan

Private Colleges That Offer a Prepaid Tuition Plan or Tuition Guarantee

Parents or guardians who anticipate their children attending private schools may benefit from choosing schools that offer prepaid tuition plans or guarantees. Like state-sponsored prepaid tuition plans, private school prepaid tuition plans allow purchasers to pay today's tuition rates toward tomorrow's education. Tuition guarantees at private schools also guard against inflation by locking in the same tuition rate for 4-5 years.

Many families planning on private education invest in the Private College 529 Plan. This plan permits the purchase of tuition credits at one of 300 participating private colleges. If the student attends a more affordable school, the plan refunds the difference. When attending more expensive schools, learners pay the difference.

Tuition plan and guarantee requirements and terms vary by school. See below for some private colleges and universities offering tuition guarantees or prepaid tuition plans.

Private Schools With Tuition Guarantees

• Concordia University at Irvine
• University of the Cumberlands
• Baylor University
• College of William and Mary
• Metropolitan College of New York

Private Schools With Prepaid Tuition Plans:

• Brandeis University
• American University
• Johns Hopkins University
• Tulane University
• Duke University