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With college being so expensive and the student loan debt crisis continuing to spiral out of control, many families are looking for ways to sidestep our current system. Most families still believe college is a good investment, but at the same time, they want to ensure that their children don’t fall into the same student loan crisis they are facing.

That often means encouraging their kids to attend trade schools instead of traditional four-year colleges or universities, but it can also mean using military service as a means to pay for school. Another option comes in the form of prepaid college tuition plans, which essentially let families “pay ahead” for school based on what tuition costs today.

That said, there are a lot of issues to wonder about before setting up a prepaid college tuition plan for your dependent. There are also many potential downsides to be aware of that can make these plans less beneficial for families that choose them.

If you’re looking into prepaid college tuition plans and wondering whether they are the right solution to your college funding problem, here’s everything you need to know and consider before move forward.

How Prepaid College Tuition Plans Work

According to education expert Bruce Hanson of First Choice Admissions, prepaid college tuition plans are tax-advantaged saving programs that let parents, grandparents and guardians “lock in” the current tuition rate if they want to start saving in advance.

One of the best examples of a successful prepaid college tuition plan comes from the state of Florida. The Florida Prepaid plan has been around for 30 years, and it lets families lock in college tuition and most fees ahead of time. Fixed payments can be made and are based on the age of the child, and families are guaranteed not to lose their investment.

Florida Prepaid plans can be opened by anyone who is at least 18 years of age or older provided they are a U.S. citizen or legal U.S. resident with a valid Social Security number. However, the child or their parent or guardian must have been a resident of the state of Florida in the last 12 months.

That said, Florida Prepaid plans can be used for a variety of schools in Florida as well as elsewhere in the country. In fact, the FAQ for Florida prepaid plans says that plans can be used “at in-state, out-of-state, public or private schools around the country – or even the world.”

With Florida Prepaid and other similar plans, Hanson says the first step is choosing a beneficiary and the state they plan on attending college at. When your beneficiary is prepared to enroll in college, the plan will make a direct payment to the institution for the current tuition cost.

If they choose an out of state school, however, families should know that they will be responsible for price differences.

According to Hanson, the biggest advantages of prepaid tuition plans include the fact that withdrawals from earnings will be tax-free if spent for college and these plans have minimal influence on financial aid. Prepaid tuition plans also help families save for college without falling behind due to inflation.

Brian Galvin of Varsity Tutors adds that these plans help families control future increases in college costs without being linked to stock market performance like a traditional 529 college savings plan.

“For families who may be risk averse in their investment strategy, they offer a way to stay ahead of future college costs without risking market volatility,” says Galvin.

In that way, you know a bit more about what you’re getting. “Sure, you may miss out on some tax-free market upside, but you have some protection against both inflation and recession,” he says.


What To Watch Out For

There are a lot more details that come with prepaid college tuition plans, and the information provided above is just a general overview. Also note that different prepaid plans have their own share of fine print and stipulations, so you’ll want to research plans you’re considering to know what you’re getting into.

However, there are some general downsides that come with prepaid plans that are nearly unavoidable. For starters, Galvin says these plans lack flexibility in general, and that makes sense considering they are typically geared to a specific school or institutions in a single state.

If a student wants to attend school out-of-state or at a private school, they’ll be able to take the initial amount invested with them, says Galvin. However, the prepaid upside is calculated differently state-to-state and doesn’t always net out to have been a great investment.

He also adds that, unlike a traditional 529 savings plan where the funds can be used widely across educational expenses like books, room and board, and supplies, prepaid tuition plans are much more limited to tuition itself.

Further, transferability is less flexible for prepaid plans, too, he says.

“If a student doesn’t attend a college or university, the prepaid plan has more restrictions on which family members could receive the benefits instead.”

Hanson also points that there are no investment options within prepaid plans, whereas 529 college savings plans let you invest your money so it might actually beat growing tuition costs over time.

Ultimately, Galvin says that the main downside of prepaid college plans can also come down to the fine print.

“Each state runs its plan a bit differently, and the security of your investment may depend on your state’s individual rules,” he says. “And since you’re not buying stocks or mutual funds like in a typical tax-advantaged investment plan, your plan depends on the state’s ability and commitment to turning today’s payments into the tuition they’ve promised.”

The Bottom Line

Before you decide on a prepaid college tuition plan, experts agree you need to weigh the likelihood of your student attending an eligible school. If they are almost certainly going to attend the in-state college or university the prepaid plan is designed for, the investment can pay off.

If not, Galvin says the financial picture is a lot murkier since the amount you’ll be able to carry with you to a private or out-of-state school can vary by state and circumstance, and in most cases isn’t going to be as lucrative as a 529 or other investment vehicle might have been.

And with any college savings plan, a family should consider how investing in college fits into its larger financial goals, he says.

For example, student loans are in the news a lot for being a large burden for students, but they do exist as an option and federal loans have some tax advantages to them. On the other hand, families have other expenses like retirement and medical costs that don’t have attractive loan options available at all.

Galvin adds that there are other ways to chip away at college costs too, including scholarships, community college credits, and work-study programs.

“While it’s certainly commendable and in many cases advisable to start investing sooner than later in a student’s college fund, every dollar invested in a 529 or prepaid tuition account is a dollar not invested in another potential priority,” he says.


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