Education Funding Part 2: Prepaid 529 Tuition Plans

As we recently discussed, not all 529 tuition planning options are the same. Another aspect of 529 plans are prepaid 529 tuition plans. This is not necessarily a savings plan, nor necessarily run by the state. As the name implies, the prepaid 529 tuition plans allow you to lock in future tuition costs at today’s prices.  The benefit is potentially thousands of dollars can be saved. Here’s the breakdown of the prepaid 529 tuition plan options:

  • Currently, there are 18 state-sponsored and one institution sponsored prepaid tuition plan.
  • Only 11 of the state-sponsored prepaid tuition plans are accepting new applicants
  • Most of these 11 state-sponsored plans have residency requirements.
  • The institution sponsored plan is the Private College 529 Plan.

These prepaid 529 tuition plans have the same tax benefits as the 529 savings plans. The earnings grow tax-free as long as you use the funds towards tuition and mandatory education expenses. You can contribute to prepaid 529 tuition plans for the benefit of your child, grandchild, or friend.  Most prepaid plans are designed to pay for tuition at a certain school or schools. The plans are either “contract” plans, where you pay for a certain number of semesters of college tuition or “unit” plans, where you to buy fractional units based on tuition costs at a target group of schools.

The Private College Tuition Plan

The Private College Tuition Plan is a very flexible prepaid tuition plan. Participants are not limited by state residency. It is owned by nearly 300 private colleges and universities nationwide. South Carolina has several participating universities. This particular plan has no fees. One hundred percent of your contributions go towards tuition. I use the Private College Tuition Plan’s characteristics in this article because it is available nationwide, and the characteristics are similar to the other state-sponsored plans. I can also be specific about this plan without concern about residency issues and variances.

You can use your contributions to the Private College Tuition Plan for up to 30 years. This plan is a “unit“ plan. You purchase tuition certificates that correlate to the participating schools. The value of your certificate depends on the current tuition rates at the different schools. For example, a $10,000 contribution may be worth .33 of a year at one school whose tuition is $30,000/yr, and it may be worth .25 of a year at another school whose tuition is $40,000 per year. The Private 529 Plan will report each year the amount of tuition for each participating school that you own.

The enrollment for this plan is year round, and your contributions are aggregated over a Program Year: July 1 through June 30. Each year you contribute you will receive a new certificate. Each certificate will represent a unit of years’ paid for each participating school. Certificates must be held 36 months from the purchase date before they can be redeemed.

If the beneficiary receives a scholarship that covers all or most of the costs of the qualified expenses, you have several options.

  • You can request a refund up to the amount equal to the scholarship. You would pay tax on the amount greater than the contribution, but it is not subject to the 10% penalty.
  • You could also roll the excess to a state-run 529 savings plan and use the funds to cover additional expenses like room and board that are not covered with the prepaid tuition 529 plan.
  • You can roll the plan to another qualified beneficiary.

If the beneficiary of the certificate goes to a school that is not one of the participating schools, then you can do several things.

  • You can roll the plan to a state-sponsored 529 savings plan.
  • Switch the plan to another beneficiary.
  • Request a refund.

Prepaid tuition 529 plans are more limited in use than state-sponsored 529 savings plans. The focus is on tuition and mandatory costs. Most prepaid tuition plans can roll into a state-sponsored savings plan if appropriate. This does extend their flexibility. Most prepaid tuition plans cannot be used for secondary or elementary tuition as this is not their purpose.

When should you use a prepaid tuition plan versus the state-sponsored 529 savings plan? That is an individual decision and should be carefully considered. There is potential to use both and optimize the benefits.  If you are interested, we can help you determine the best strategy for you and your child or grandchild. The point is there are tools to use to save and plan for education. Take advantage of them. Have fun!

 

Respectfully submitted,

Kyra H. Morris, CFP®
I am not employed by nor receive any remuneration from the Private 529 Plan

 

References:

  • Prepaid College Savings Plans: Here’s What You Need To Know, by Kathryn Flynn Updated 2017-12-12 www.PrivateCollege529Plan.com
  • Busting the Top 7 Myths About Prepaid 529 Plans, by Florida Prepaid College Board

 

The opinions expressed herein are those of Morris Financial Concepts, Inc. and are subject to change without notice. Morris Financial Concepts, Inc. is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Morris Financial including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request. MFC-18-06