Prepaid tuition plans, meanwhile, allow people to pay for some or all of the costs associated with an in-state, participating school at a locked-in rate for either a private or public college or university. The funds can be removed as long as they’re used for qualified education purposes.
“With a prepaid plan, you pay one contract price that will cover tuition and fees, regardless of the investment market or tuition inflation,” Baker says.
Most prepaid plans, which do not pose a risk of losing money because there are no investment options, can be converted if the student decides to go to an out-of-state school.
“[In Illinois] students can use the plan to attend almost any private or out-of-state school across the nation,” Baker says. “Under those circumstances, the plan would simply pay benefits toward the cost of going to a private or out-of-state school based on the weighted average tuition and fees for Illinois public schools for the student’s type of prepaid plan at the time the student attends college.”
Chris Long, with Long Financial Planning in Chicago, says parents who live in Illinois can enroll in a prepaid tuition program with the University of Illinois and pay that tuition now at a discounted rate. This allows parents to lock in the rate for a college when the child is young, and not have to pay for tuition increases.
“You pay it now and you get a discount,” Long says. “It’s a good idea to evaluate the different savings plans and what state plan might be best for you.”
Unlike college savings plans, though, only some of the prepaid tuition plans cover room and board, and there are specific enrollment periods and age restrictions. Prepaid programs in Florida, for example, are designed for newborns through students in the 11th grade.
However, unlike college savings plans, there usually are residency requirements. In Florida, in order to register for that state’s 529 prepaid tuition plan, the child or his or her parent or legal guardian must have been a Florida resident for the past 12 months.
If your child doesn’t make the necessary grades or end up going to college, most 529 plans allow the custodian to change beneficiaries. The money can be taken out for non-educational purposes if this is the case, but you’ll likely have to pay both income taxes and a penalty.