As the stock market swoons and tuition costs soar, more families are deciding to pay for college in advance through their 529 plans.
For years, families have preferred the savings type of 529 plan — named for the relevant section of the tax code — salting away after-tax dollars, investing them in mutual funds and other investments, and then taking the money out, tax-free, when the time comes to pay for school. But as many of these accounts have been savaged by the market’s plunge this year, families are now turning to the prepaid variety of 529.
Prepaid plans allow families to lock in current tuition rates by making an upfront cash payment in exchange for tuition contracts or credits tied to current rates. They can prepay either the full tuition bill or a portion of it, typically based on the average tuition costs in the state. States usually manage the money, and when a student finally enrolls, he won’t have to pay more — no matter how much tuition costs have risen.
If investors buy only a portion, that same amount is credited toward future tuition bills. In general, the tuition guarantee applies only to state schools within that state, though you can use the money to pay for out-of-state schools. If a beneficiary elects not to attend a college covered by the plan, the investor can withdraw his contributions, usually with interest.