Paying for College With Prepaid Tuition
Prepaid tuition is just what it sounds like. Instead of paying for college later in life, the student (or, more likely, the student’s parents) pays tuition in advance. Then, when it is time for college, part – or even all – of the tuition bill is already paid for. It makes for a system that not only makes the financial burden a little easier by spreading out the payments, but also protects the student from rising tuition costs.
There are two main categories of prepaid tuition: tuition units and tuition contracts. About 220 individual institutions offer these plans, and almost half of the states offer prepaid tuition plans. The great thing about state plans is that most of them are available to be used at any college or university in the state, while institutional plans are only good at a specific school. Plus, prepaid tuition is covered by section 529 of the tax code. This means that they are exempt from federal income tax until 2011. There are even states that have individual tax codes that are similar. Estate planning benefits are also associated with prepaid tuition plans.
Tuition Units.
This plan breaks college tuition down into units. One unit is equal to 1 percent of one year’s tuition costs. So each year it is possible to determine how many units you want to buy. It takes 400 units to cover four years of school, and you can buy as many or as few units each year as you can afford. If you have 150 units, this means that you have effectively paid for three semesters of schooling. The price of the units varies as tuition goes up, but once you’ve purchased a unit, it is yours. So if you purchased 100 units when tuition was $3,000 per year, in 10 years when your child has her or his first year of college (and tuition is now $7,500 per year), you don’t have to pay the difference. You’ve already got the first year paid for – and for less than half of what others are paying.
Prepaid Tuition Contracts.
The contract plan protects against rising costs of tuition. Prepaid tuition contracts lock in an amount, and thus guarantees the student’s tuition costs. These contracts work much the same way as buying a car does. The contract is negotiated according to the current cost of attending school, and how much it is likely to cost later. The student’s age is taken into consideration, as is the initial payment, need, and credit. Additionally, the number of years you will pay on your contract, and whether or not you pay as a lump sum, affects your total cost. But once the contract is set, the price won’t go up.
Drawbacks to prepaid tuition include limited school choice, low rate of return on cash refunds (if you decide not to use the plan), and decreased eligibility for federal financial aid. Such a plan falls into the same category as scholarships and grants. You may be putting yourself out of reach of a Pell Grant if the educational resource puts you over the limit of need.
Prepaid tuition plans can be good for nearly anyone, but they should be researched first. These plans requite that you plan carefully and make commitments to paying. Additionally, you should take into account your likely chances of getting financial aid, and whether you will use the tuition credits or contract at available schools (plus, the student still has to get in). Middle to upper-middle class students are most likely to reap the benefits of such a plan. These are the people who make too much to qualify for need-based financial aid, but do not make enough to cover ever-increasing college costs.
