Many people save for college using 529 accounts, but did you know that there are different "types" of 529 plans? The most common 529 plans are savings plans and such plans had over $100B in assets as of September 30th. The less popular, or less well-known 529 plans, are pre-paid plans. These plans had approximately $16B in assets according to the College Savings Plan Network.
Pre-paid plans, as their names suggest, allow savers to lock in current tuition rates. You contribute today and each deposit purchases tuition credits tied to current tuition rates. You can pre-pay the entire cost, or just a portion of the total cost. States manage the money invested in the plan and when the student ultimately enrolls in a school, a percentage or portion of his or her tuition is already "covered" no matter how fast tuition has increased over the years.
Pre-paid plans generally aren't as popular because only about a dozen states even offer the plans and they come with a lot of strings attached. In most instances, either the account owner or the beneficiary needs to live in the state in order to invest in the states plans. (However, Massachusetts' pre-paid plan allows anyone to invest in the plan.) Also, some plans offer open enrollment only during certain times of the year and some even restrict participation to students younger than high school age. Generally, dollars invested in pre-paid plans can only be used for undergraduate tuition and fees. Finally, the tuition guarantees usually only apply to state universities. If the student ends up going to a college outside of the plan, you can get your money back, but the interest earned is usually quite low.
A recent Wall Street Journal article suggests that now is an excellent time to be investing in these plans because double digit tuition increases are very possible now that many states are facing state budget shortfalls and college's endowments are down given the poor performance of the market lately. I have never been a big fan of these plans, but they could make sense for people who are very conservative and very nervous about investing college money in the markets.
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