Parents who bought college tuition credits in advance for one child may not be able to afford to do so for a second child. But it may not be easy for parents to divvy up funds saved in units of tuition rather than as cash or investments.
With a prepaid tuition plan, parents purchase tuition credits or a contract for a certain amount of credit hours at current prices – typically based on tuition prices at the public colleges and universities in the state offering the plan. Those credits can be redeemed once their child is old enough to attend college.
The plans are a way for parents to hedge against increases in tuition costs as their children grow up. Prepaid tuition plans offer the same tax benefits as a 529 plan, but can generally only be used to pay for tuition and fees, not room and board or other expenses.
Each state has varying rules for how and when a beneficiary, the person who can use the college savings account, can be changed. Here are the questions parents should consider before changing the beneficiary on part or all of a prepaid tuition contract.
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1. Is there a reason one child would benefit more? For example, say a couple bought a Private College 529 Plan for their oldest child 10 years ago, with no idea where the child would attend school – but the child is ultimately offered a scholarship to a state college.
Instead of cashing out the plan at the investment value, the parents can use the funds to the fullest by changing the beneficiary to a younger child, says Nancy Farmer, president of the Private College 529 Plan, which allows families to purchase prepaid tuition at more than 270 participating private colleges and universities.
Because tuition is purchased at the present-day price and then redeemed in the future, tuition may be quite a bit higher by the time a younger child uses it. The family gets more value out of the investment.
2. How easy is it to change names on contracts? Changing beneficiary names on tuition contracts is usually fairly easy and normally just requires a form.
"To change the beneficiary on a Texas Tuition Promise Fund account, the new beneficiary must meet state residency requirements and must be a member of the current beneficiary's family," says R.J. DeSilva, spokesperson for the Texas Comptroller of Public Accounts.
Sometimes there are fees associated with changing the beneficiary. Nevada, for instance, charges $20.
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3. Is there a time frame before there are extra tuition charges? For the Private College 529 Plan, it doesn't matter how far apart children are in age. For state plans, there will often be a designated time period during which the benefits must be used.
In Nevada, the new beneficiary can't be more than three years older than the current beneficiary, says Nevada State Treasurer Kate Marshall. Families can change beneficiaries on a contract to another family member, including a first cousin, as long as the benefits have not yet been used. However, there can't be more than six years between the original beneficiary's projected college start date and that of the younger child, or families will incur extra fees.
In Florida, families could have to make an additional payment if the projected year for the younger child's first year of college is more than three years from the date the older child would have gone to college, says Christa Hudson, spokeswoman for the Florida Prepaid Plan.
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4. How easy is it to give some credits to each child? The easiest way is to give children whole contracts, experts say. For instance, parents may have separate contracts that cover a specific number of credits or semesters.
If parents purchased eight semester contracts or four yearlong contracts, they can just divide these by two and distribute them equally to each child. Dividing one contract among more than one child can get more complicated. Either way, the plan the parents are participating in should be consulted for exact rules.