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    Prepaid Tuition Plans: Everything You Need to Know

    By Cece Gilmore

    Cece Gilmore is a Content Writer at Scholarships360. Cece earned her undergraduate degree in Journalism and Mass Communications from Arizona State University. While at ASU, she was the education editor as well as a published staff reporter at Downtown Devil. Cece was also the co-host of her own radio show on Blaze Radio ASU.

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    Edited by Maria Geiger

    Maria Geiger is Director of Content at Scholarships360. She is a former online educational technology instructor and adjunct writing instructor. In addition to education reform, Maria’s interests include viewpoint diversity, blended/flipped learning, digital communication, and integrating media/web tools into the curriculum to better facilitate student engagement. Maria earned both a B.A. and an M.A. in English Literature from Monmouth University, an M. Ed. in Education from Monmouth University, and a Virtual Online Teaching Certificate (VOLT) from the University of Pennsylvania.

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    Posted: July 1st, 2024
    Prepaid Tuition Plans: Everything You Need to Know

    College tuition is expensive and unfortunately does not seem to be becoming more affordable anytime soon. In order to combat rising tuition costs, you can enroll in a certain type of 529 plan known as a prepaid tuition plan. These plans allow families to “lock in” today’s tuition and fee costs, adding up to significant savings in the future! However, prepaid tuition plans typically have stricter rules regarding what college a beneficiary of the account can attend. Keep reading to find out everything you need to know about prepaid tuition plans to determine if it is something you should invest in! 

    What is a prepaid tuition plan? 

    A prepaid tuition plan allows the owner of the plan to prepay tuition at today’s tuition rates at eligible public and private colleges or universities. Prepaid tuition plans are a type of 529 plan and are primarily for students who plan to go to an in-state college or university. The plan allows you to combat the inflation of future tuition costs by paying the current rate of tuition.

    Most prepaid tuition plans are by state. Meaning, the beneficiary of the prepaid tuition plan must reside in a state that offers the plan and additionally must attend an in-state university to be able to use the funds from that plan. 

    There are only eight states currently offering prepaid tuition plans. Here is a list of the states that offer prepaid tuition plans: 

    1. Florida
    2. Massachusetts
    3. Michigan 
    4. Mississippi
    5. Nevada
    6. Pennsylvania
    7. Texas
    8. Washington 

    Related: How to get in-state tuition as an out-of-state student

    Prepaid tuition plans vs 529 plans chart

    Prepaid tuition plans vs 529 plans 

    Prepaid tuition plans are a type of 529 plan with more restrictions than a typical 529 plan. One of the biggest differences between a prepaid plan and a 529 plan is that prepaid tuition plans are typically only for students who reside in the state the plan is being offered. While you can invest in any 529 plan without any residency requirements. 

    Another big difference is that prepaid tuition plans typically have owners purchase units or credits for future tuition while 529 plans have you invest money in a portfolio of your choice. 

    Lastly, prepaid tuition plans typically only cover tuition and fees while 529 plans have looser rules about what counts as an educational expense

    Ultimately, both prepaid tuition plans and 529 plans are ways to save money for future college expenses. 

    Also see: How to choose the best 529 plan 

    Advantages and disadvantages of prepaid tuition plans chart 

    Advantages of prepaid tuition plans

    Prevents inflation

    The biggest advantage of prepaid tuition plans is that it allows you to lock in today’s tuition prices which decreases any worries of rising tuition costs in the future. This means you can save a significant amount of money if tuition rates rise (and most likely they will!). Additionally, families can plan more accurately for future educational expenses without worrying about any changes to their tuition prices. 

    Tax benefits

    There are a lot of tax benefits associated with having a prepaid tuition plan. Typically, earnings on prepaid tuition plans grow tax-free and can be withdrawn tax-free as long as the funds are used for qualified educational expenses. Additionally, some states may even offer tax credits or deductions for contributions to prepaid tuition accounts. 

    Also see: Filing taxes as a college student

    Security 

    Many prepaid tuition plans have benefits associated with them including tax benefits, tuition benefits and benefits if any plans change with the beneficiary. This is because many prepaid tuition plans are backed by the state government which means that your prepaid tuition plan funds are protected and guaranteed. 

    Disadvantages of prepaid tuition plans 

    Restrictive

    Prepaid tuition plans are typically limited to in-state public 2-year or 4-year institutions. Therefore, if a beneficiary decided to attend a private or out-of-state school, the benefits may be reduced. Additionally, prepaid tuition plans are typically restricted to only being able to be used for tuition and mandatory fees. This means other educational-related expenses may not be allowed to be used with your prepaid tuition plan funds. 

    Related: All about the tuition and fees deduction 

    Residency requirements

    Many prepaid tuition plans require the account owner or beneficiary to be a resident of the state that offers the plan. This can be an extreme disadvantage for families that need to move out-of-state due to extenuating circumstances. 

    Penalties 

    If your prepaid tuition plan funds are used for non-qualifying educational expenses or if the beneficiary does not qualify to use the funds such as attending an out-of-state university, withdrawals may be subject to penalties and taxes on the earnings. Therefore, it is critical that you are confident that your beneficiary will be able to use the benefits of the prepaid tuition plan by attending one of the qualifying schools. 

    Breakdown of prepaid tuition plans by state

    Florida Prepaid Plan

    The Florida Prepaid Plan is a state plan that allows families to lock in college plan prices while prepaying the future cost of college tuition. The Florida Prepaid Plan is backed by a guarantee from the State of Florida which means if the cost of college tuition is higher than you anticipated when your prices were set, the Plan will pay the cost. 

    In order to open a plan, the beneficiary or his/her legal parent must have been a Florida resident for the past 12 months. However, the individual opening the Florida Prepaid Plan just needs to be a U.S. citizen with a valid SSN. Additionally, family and friends can contribute to your plan, not just the individual who opens the plan. 

    One amazing perk of the Florida Prepaid Plan is that the plan can be applied at other schools nationwide, despite being intended for Florida in-state colleges and universities. If the beneficiary decides not to attend college, then the benefits can be transferred from one student to a family member of the student. 

    Additionally, Florida residency is only required to purchase a plan, but not required to keep one. Meaning, if the beneficiary moves out of state, the plan can continue as if they still resided in Florida. Another bonus of a Florida Prepaid Plan is that if the student then decides to attend a Florida college, they will be considered an in-state resident for tuition purposes. 

    Massachusetts U.Plan Prepaid Tuition Plan 

    The U.Plan is the Massachusetts prepaid college tuition plan which allows users to lock in current rates on tuition and fees. Over 70 colleges and universities in Massachusetts participate in the U.Plan which allows for a lot of options when it comes to selecting a higher education school.

    There are many benefits to using the U.Plan including the following: 

    • If your beneficiary does not attend a participating college, you get your money back with interest
    • You do not have to choose a school until it’s time for your beneficiary to attend college
    • You can qualify for a state income tax deduction of up to $2,000 
    • You can invest as little or as much as you want causing a lot of flexibility
    • U.Plan savings counts as a parents asset in the financial aid formula 

    In order to open a U.Plan account, you must be a U.S. citizen but you do not have to be a Massachusetts resident. 

    Michigan Education Trust (MET) 

    Michigan Education Trust or MET is a prepaid tuition savings plan. The beneficiary of a MET must be a Michigan resident at the time the account is opened, however the plan-opener needs to be a United States citizen. 

    MET plans can be used at any Michigan public university or college once the student is admitted. However, if a student is admitted to a private Michigan college, then MET pays funds to the school based on contract provisions. If the student decides not to attend college, then you can transfer the MET to an eligible family member or receive a refund. 

    Mississippi Prepaid Affordable College Tuition Plan (MPACT)

    The MPACT is a prepaid tuition plan that is guaranteed by the State of Mississippi. The MPACT can be used for community college, university or a combination from one year up to five years. Additionally, you can even transfer from one college to another through MPACT. 

    The MPACT contract covers tuition and mandatory fees. It does not cover the cost of books, transportation, room and board or other fees. 

    Depending on the MPACT contract you choose to enroll in comes with different benefits and perks. For example the Legacy contract allows up to 10 years from the student’s projected college enrollment date to use the benefits while the Horizon contract allows up to 8 years. Therefore, be sure you are researching both options and weighing the pros and cons to determine which contract is the best fit for your beneficiary. 

    Nevada Prepaid Tuition Plan 

    The Nevada Prepaid Tuition Plan pays for the number of undergraduate credit hours paid for by the purchaser of the prepaid plan. The Nevada Prepaid Tuition Plan allows purchaser’s to lock-in today’s tuition prices preventing any inflation or tuition changes from affecting their beneficiaries ability to attend college or university. 

    Benefits of the Nevada Prepaid Tuition Plan include the following: 

    • Students have 6 years after high school graduation to use their benefits
    • Benefits can be transferred to any eligible institution nationwide
    • The program can be used in conjunction with scholarships
    • You can request a refund and cancel anytime 
    • There are various payment options such as a one time payment, five year payment plan, ten year payment plan, or monthly payment plan
    • Prepaid tuition earnings are tax exempt 

    Pennsylvania PA 529 GSP

    PA 529 GSP is a prepaid tuition plan where you choose a tuition level which can range from a community college to an Ivy League institution. Depending on the level you choose, you will be given a different GSP credit rate. Any PA 529 GSP earnings are both federal and state tax-deferred when used for qualified educational expenses. 

    Unlike most prepaid tuition plans, PA 529 GSP can be used at most schools in the United States and is not limited to Pennsylvania. Additionally, you can use the funds to pay for more than just tuition meaning you can use the funds for room and board, books, supplies, fees, and more! This makes the PA 529 GSP one of the most flexible prepaid tuition plans available. 

    Texas Tuition Promise Fund 

    The Texas Tuition Promise Fund is a prepaid tuition plan in which units can be purchased at a fixed rate. These tuition units can be used at most Texas two-year and four-year public colleges and universities. However, there is a transfer value of the units if the beneficiary decides to attend a different school or out-of-state institution. 

    Additionally, if the beneficiary moves out of Texas they still will be able to redeem the tuition units as an in-state student. However, any hours not covered by the Texas Tuition Promise Fund will most likely be charged as out-of-state tuition. 

    Check out a Scholarships360 breakdown of the Texas Tuition Promise Fund with Texas-sized information about the program! 

    Washington Guaranteed Education Tuition (GET) 

    GET is a prepaid tuition plan in which you purchase units to then be converted into years of tuition at Washington public universities. For example, 100 units equals the cost of one year of undergraduate tuition and fees at Washington’s most expensive university. The money put into this plan will grow tax-free and withdrawing the funds will be tax-free as long as the beneficiary uses the funds for qualified education expenses.

    GET is a flexible program that allows beneficiaries to use the funds for tuition, room and board, books, computers and other qualified expenses. The only requirement to open a GET is that either the owner of the account or the beneficiary is a Washington resident. 

    Additionally, a beneficiary of a GET plan can attend a public university, local community college, technical school, private university or even a college in another state without losing monetary value of their GET funds. 

    Also see: Top trade school scholarships

    Is a prepaid tuition plan worth it? 

    Ultimately, a prepaid tuition plan is a great option for individuals who want to save money while saving for college tuition. However, only eight states currently offer a prepaid tuition plan. Therefore, if you live in one of these states, it may be wise to contribute to a prepaid tuition plan in that state. It is important to recognize that your beneficiary must attend an in-state college or university to reap the benefits of these funds. Consequently, if there is any doubt in your mind that your beneficiary will not want to attend an in-state public university, it may be wise to open a 529 college savings plan that allows more flexibility with similar benefits. 

    Overall, a prepaid tuition plan is an advantageous 529 plan in a lot of regards. So, research options in your state and weigh the advantages and disadvantages to determine what type of savings plan will give you the most benefit for your particular and unique situation. 

    Frequently asked questions about prepaid tuition plans

    What happens if my prepaid tuition plan beneficiary does not go to college?

    Every prepaid tuition plan has slightly different rules regarding this, but typically, you can change the beneficiary to another member of the family or withdraw your assets with a penalty.

    What if the beneficiary receives a scholarship?

    If the beneficiary receives a scholarship, most plans will allow the value of the prepaid tuition to be used for other qualified expenses or offer a refund equivalent to the scholarship amount. If you find yourself in this situation, be sure to reach out to your prepaid tuition plan contact in order to find out! 

    Do prepaid tuition plans cover room and board?

    These plans typically do not cover room and board. However, there are restrictions, as some prepaid tuition plans allow students to use the funds on more than just tuition and fees. So, be sure to double check with your particular plan and its restrictions.

    Can I open up both a prepaid tuition plan and a 529 plan for the same beneficiary?

    Yes! You can open up multiple accounts for the same student and more than one person can contribute to a college savings plan. However, there are typically limits that you need to be aware of that limit the amount that can be added to one fund.

    What should I consider when choose a prepaid tuition plan?

    Consider important factors such as the types of institutions covered, the flexibility the plan may have, state tax benefits, and refund policies. By comparing these characteristics, you can choose the best prepaid tuition plan for your needs.

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