By Kyra Morris, contributing editor | 529 education saving plans are not all savings plans, as we discussed recently in this space, and all of them are not all are run by the state. There is another alternative: prepaid 529 tuition plans.
As the name implies, you lock in future tuition costs at today’s prices. The benefit is that potentially thousands of dollars can be saved. Currently there are 18 state-sponsored plans and one institution-sponsored prepaid tuition plan. Only 11 of the state-sponsored prepaid tuition plans are accepting new applicants and most of these have residency requirements. The institution-sponsored plan is the Private College 529 Plan.
These prepaid 529 tuition plans have the same tax benefits as 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 is a very flexible prepaid tuition plan and 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. In this article, I use the Private College Tuition Plan’s characteristics to describe prepaid plans in general 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 per year but 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 that 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 pay tax on the amount greater than the contribution, but it is not subject to the 10 percent 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, or 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 or 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 that is appropriate. This does extend their flexibility. Most prepaid tuition plans cannot be used for secondary or elementary tuition. This is not their purpose.
When should you use a prepaid tuition plan verses 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. Your financial advisor can help you determine the best strategy for you and your child or grandchild. The point is that there are tools to use to save and plan for education. Take advantage of them.
More resources:
- Prepaid College Savings Plans: Here’s What You Need To Know, by Kathryn Flynn, updated Dec. 12, 2017
- PrivateCollege529.com
- Busting the Top 7 Myths About Prepaid 529 Plans, by Florida Prepaid College Board
Kyra H. Morris, a Certified Financial Planner, is CEO of Morris Financial Concepts, Inc., in Mount Pleasant. A national leader in the financial planning profession, she has been named several times by leading magazines as one of the country’s top financial planners. Disclaimer: “I am not employed by not receive any remuneration from the Private 529 Plan”
- Have a comment? Send to: editor@charlestoncurrents.com
We Can Do Better, South Carolina!
Like us on Facebook
Follow us on Twitter
Use our feed
Send us your comments
