Locking in Tuition Costs

December 10, 2008
Special Feature

When so-called 529 college-savings plans first appeared on the scene, most were the kind of plan where depositors put in after-tax money, invested it in mutual funds or other investments, then took the money out tax-free to pay for college.

When so-called 529 college-savings plans first appeared on the scene, most were the kind of plan where depositors put in after-tax money, invested it in mutual funds or other investments, then took the money out tax-free to pay for college.

There is another kind of 529 plan, however, that allows families to lock in current tuition rates for future use. In the midst of the stock market turmoil and forecasts that shrinking state budgets will lead to hefty tuition increases at state-run colleges, more families are turning to this type of 529 plan to help pay for a college education.

More than a dozen states now offer prepaid 529 plans, which allow families to pay either the full tuition or part of it up front. Once the student actually enrolls, he/she won’t have to pay more, no matter how much tuition costs have increased. The tuition guarantee generally applies only to state-run schools in that state, although those who choose to go to an out-of-state college can get their money out, usually with interest.

Although most states require either the account holder or the beneficiary to live in the state to be eligible to open a prepaid 529 account, two states—Massachusetts and Alabama—allow anyone to invest. There is also a prepaid 529 plan for private colleges, the Independent 529 Plan (http://www.independent529plan.org), which allows families to prepay tuition at nearly 280 private colleges, including prestigious schools like Princeton, Stanford, Notre Dame, and Duke.