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Avoid Prepaid Tuition Plan Problems When Transferring

Families who fail to report a college transfer may end up short on tuition.

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Parents who have saved for their children's college education in a prepaid tuition plan need to consider what happens if a child changes schools just before his or her first year or later as a transfer student.

Prepaid tuition plans, a special kind of the tax-advantaged education investment accounts known as 529 plans, allow parents to buy tuition certificates at today's prices to pay for tuition in the future. Tuition and fees are generally guaranteed at an in-state or private school rate, depending on the plan.

Not notifying the plan before changing schools can cause inaccurate estimates of a family's out-of-pocket expenses after the amount of tuition and fees covered is assessed.

[Learn the do's and don'ts of using a prepaid tuition plan.]

For traditional 529 plans, changing schools is not a problem, says Mike Fitzgerald, chairman of the College Savings Plans Network. "The account owner simply tells the 529 plan how much to send to the new school."

When changing the designated school for a prepaid tuition plan, however, there are a few things families should know.

Families who use a prepaid tuition plan to pay for college often have two options for disbursement. They may elect for the prepaid plan to pay the school directly, or families may also request the amount from the plan for tuition and fees amount be sent to them instead.

If parents choose to take the distribution themselves and then pay tuition and fees to the school, they don't have to worry about the wrong school being paid. However, they could be paid too much or too little for tuition and fees, says Kathleen F. McGrath, director of the Pennsylvania 529 College Savings Program.

Her state's prepaid plan pays for tuition and fees at any public school in Pennsylvania. Not all Pennsylvania schools have the same tuition cost.

[Find out how to get your money out of a prepaid tuition plan.]

If families take a distribution for a school that is cheaper than the state school the student is going to actually attend, they may be short on tuition and fees that would have been covered if they asked for a distribution for the correct school, she says.

Any errors need to be corrected immediately so families can get back any money for tuition and fees to which they may be entitled.

Out-of-pocket expenses can also be affected by differences in the cost of tuition and fees. A family can only find out what they will actually pay after the prepaid plan disbursement by contacting the plan itself – a step they should take as soon as they know changing schools is a possibility.

If a student is looking to change schools and has a prepaid tuition 529 plan, families should start early in the last semester at the student's current school to make the change. Starting earlier will help ensure both that the right school is paid and that everyone understands whether there will be a difference in out-of-pocket expenses.

[Don't fall for these college savings myths.]

Not all prepaid plans handle transfers the same way. "For most programs, you don't have to tell the 529 plans where you are going to school when you open the plan," says Pennsylvania's McGrath. However, it is helpful to know the type, such as public or private, and know how much tuition and fees the plan will cover.

Families considering a student's transfer should contact their 529 plan to find out the rules as each plan's rules are dictated by their state legislatures, she says. Many differ from state to state, including rules about when families need to request a distribution to get it in time to pay for the semester.

Rules can also determine whether only the school and not the family can receive a distribution. And finally, states differ in how they calculate the college costs that families can pay for through 529 plans.

There is one thing that doesn't change, says Ted Sarenski, a certified public accountant and personal financial specialist based in New York.

That's the need to plan for a transfer as soon as possible, he says.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.