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Prepaid 529s: Another Option?

By Harold Simansky
Educational Investment Advisor

529 Prepaid Plans offer a different option in saving for college. Not to be confused with 529 Savings Plans, the prepaids allow you to lock in future tuition costs at today's prices. You make the full payment now or pay over time. Then, when your child is ready for college, no matter how high tuition has risen in the meantime - the program takes care of it at any participating school.

While such pre-paid plans are ubiquitous among public colleges and universities, until recently, very few private schools offered a prepaid plan. But this changed with the emergence of the Independent 529 Plan (, which is specifically for private colleges and universities. As with the state-sponsored 529 Prepaid Plans, participants can purchase tuition certificates at current prices – even with a small discount – and then use these certificates at any private college taking part in the program. Currently about 250 private colleges and universities participate in the Independent 529 Plan.

This is considered a tax-advantaged plan because you have made an investment worth a certain amount, have seen that investment increase in value; and yet you haven't had to pay any taxes on this increase in value.

A Look at the Disadvantages

Prepaid plans offer some advantages, including low-risk, guaranteed returns on your investment. But they also come with a catalog of disadvantages, chief among them is a lack of flexibility.

Consider this scenario. You've invested in a prepaid program, but your child decides to attend a college that isn't in the private school consortium - or maybe she decides not to go to college at all. You want to get your money out of the plan, and you might be able to do that - but probably not without paying various fees and penalties that significantly reduce any earnings you would have had on this money.

While some plans will pay some interest on your original contributions, a number of them will not - and invariably the rate of interest that is paid is extremely low. For example, in Massachusetts, you get your contributions back along with interest based on the rate of inflation - which is practically nothing and generally worse than even a conservative investment.

In the past, another serious disadvantage for 529 Prepaid Plans is how they were treated from a financial aid perspective. Happily this is no longer the case. A recent change in the tax law now has 529 Prepaid Plans considered the asset of the parent rather than the student. In this way, both 529 Prepaid Plans and the more popular 529 Savings Plans have the exact same effect on financial aid i.e., a minimal effect.

At best, a prepaid plan is but a partial solution because you can only use the money for tuition. Given that about 25 percent of a college bill is for room and board, it's likely you will need a second savings plan to cover this piece of the cost. This is why a 529 Savings Plan or a Coverdell Education Savings Account might be a better choice. Both of these programs cover not only tuition but also room and board.

For the right family, a prepaid plan may make sense. If you are a conservative investor with a good sense of where, and whether, your child will attend college, a prepaid 529 merits some investigation. For most families, though, they are the least beneficial of the savings programs we have discussed. Given their inflexibility and low rate of return, it's best to shop around for a more advantageous way to save for college.

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About the Author

Harold Simansky is the founder of Educational Investments, LLC, ( a Registered Investment Advisory firm focused on helping families save for education. His book, College Costs How Much?! The Workbook to Help You Save for School, which explains the financial aid process, is available at You can send him an e-mail at

Related Resources

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