Surely, every parent wants to ensure a bright future for his or her child. Although some are blessed with adequate wealth, enough for them not to be bothered by sky high college tuition fees that continue to increase every year, there are still a lot others who are financially challenged. However, this should not prevent parents from doing their best to provide for their children’s education. A popular option for parents earning a monthly income just enough for bills and other common luxuries is an early started educational plan. One of the most popular ones these days is a prepaid college plan.
What is Prepaid College or Tuition?
A prepaid college tuition plan, also known as Prepaid Education Arrangement or PEA, allows parents to pay for a part or the whole amount of public college education at present-day rates. The value of these prepaid tuition plans are guaranteed by the government to be equal or even more than the yearly in-state public education tuition inflation.
Prepaid college plans are offered by colleges and the states itself. It is one of the two college savings plans covered by the Section 529 of the IRS or Internal Revenue Service. Unlike a traditional 529 plan, which you save and invest in for future college expenses, with this plan, you pay the tuition directly in monthly or semi-annual payments, and are guaranteed to have paid the predetermined rate of the specific college or university system (say $5,000 a year when you started the plan, even if the current rate is now $10,000 a year). Here are some other types of education savings accounts.
The main difference between a prepaid tuition plan and a regular college savings plan is that the pre-paid children are not taxed once they withdraw the money to use in entering college. Thus, all of the funds from the plan can be used to spend for the tuition fees, books and other miscellaneous fees as well as usual living expenses. And remember, it is all at the original guaranteed rate.
The Pros and Cons of a Prepaid College Plan
Using a prepaid tuition plan offers a number of advantages but it also has a few disadvantages.
The most obvious advantage of prepaid college plans is that parents need not worry about their child’s college tuition any longer. When their children goes to college, there is no need for them to be bothered about the continual increase in college tuition fees because they have already paid for it at a lower cost. The ultimate advantage that prepaid college tuition plans can offer is peace of mind and assurance.
Moreover, it is a low risk investment. Basically, these plans are given out and handled by the government. Thus, parents can be assured that their investment is safe and guaranteed. It will gain profit to enhance its value so that it can match with the tuition fee rates several years after the plan was purchased.
However, it also has a few disadvantages. First, there could be a limitation on the colleges where the pre-paid child can enroll (you are usually restricted to the specific institution or system where the pre-paid tuition deal was started). Also, the income produced from this investment is not as big as others. It also holds the pre-paid student ineligible of other grants and government financial aids.
Who Should Consider Getting a Prepaid College Plan?
A prepaid college plan is ideal for parents who are getting ready to pay for their children’s college tuition within the next five years. It is best for parents who are certain that their child is willing to enroll and study in one of the colleges recognized by the plan.
Reader, what are your thoughts? Do you think that this system works well. I know there are only a few places to get it, but it sounds like a good deal to me!
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This post was written by...
Robert – who has written 317 posts on The College Investor.
Robert is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances. You can learn more about him here and connect with him on Twitter or Facebook.
{ 8 comments… read them below or add one }
A pre-paid college tuition plan has its benefits, but I think it is very important to note that a pre-paid plan only covers “Universal Fees”. This means that the pre-paid plan will only cover fees that are charged to ALL students.
This limits these funds to the actual tuition costs. Pre-paid plans DO NOT cover housing, a meal plan, books, or any other optional fees. For many students, these costs can add up to thousands of dollars per semester in fees that are NOT covered by a pre-paid plan.
I have found that many parents prefer to invest in a 529 plan, as it can be used for any educational expenses, which could include academic fees, books, meal plans, and housing. Some parents even like to invest in both of these, to ensure that their students are adequately covered.
It really depends on the state or system that offers the plan. Most do cover books and other education expenses, but I have seen the universal fee every now and then as well.
Interesting concept! But I too would prefer a 529 for flexibility.
I’ve never really looked into saving for our kid’s college yet. Shame on me. Anyway, it sounds like an interesting route to go if you know where they will go, but what if they don’t get accepted to that school? Still, it could be an affordable way to cover college costs.
It can be challenging – that is why many plans are for state schools (like the State of Floria University System). That gives you some flexibility in the school choice.
I don’t like prepaid tuition because you’re locked into going to certain schools. right? Our state 529 has that option, but you’ll have to go to one of the state school. I’d rather keep that option open in case baby RB40 can get into Harvard medical school.
We have not contributed to our children’s funds yet. We are trying to get out of debt first. Then, I think when we are ready to put aside money for college, we will put it in a Roth IRA. I hope that my kids will go to school where their dad teaches so they will get a large tuition discount, at least for the first two years.
Interesting. I didn’t even know these existed. I don’t think we have them in Canada. Here you can get student loans and pay them off interest free while you are in school. Once you graduate though you pay interest after 6 months. We also have the RESP plan where parents can put aside money for college and the government matches that investment up to a maximum.