12 Questions to Ask Before Investing in a Prepaid College Savings Plan

They are considered good options, but be sure to understand the fine print before opening an account.

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What happens if your child doesn't attend a college that participates in your plan? Some plans let parents cancel their contracts and withdraw the equivalent of the prepaid tuition for use at other schools. But the Independent 529 Plan refunds only the original contributions, plus or minus minimal investment returns or losses. The now-closed Texas Guaranteed Tuition Plan says that starting November 1, it will refund only parents' original contributions minus administrative fees. Massachusetts returns investors' principal plus inflation.

What happens if the student doesn't go to college right away? Some plans require the prepaid funds to be used by the time a student reaches 28.

Is your child young enough to qualify for a prepaid plan? Many prepaid plans require parents or grandparents to invest several years ahead of a child's enrollment in college, in order to build up some investment earnings.

How "guaranteed" is the plan? Despite their names, most of the plans aren't really guaranteed.

[For more, see 'Guaranteed' College Savings Plans May Soon Break Promises.]

The safest guarantees are generally considered to be those backed by the "full faith and credit" of a state, as are the plans in Florida, Massachusetts, Mississippi, and Washington. Promises backed by the participating colleges, such as the Independent 529 Plan and Texas's new Tuition Promise Fund, are also considered comparatively secure. Plans that are both backed by their own assets and are currently well funded (such as Alaska's) are also more likely to meet their commitments.

Will you get a state tax break for any contributions? Most states (29) give tax breaks only for contributions to that state's 529 savings plan, which typically (though not always) makes investing in-state the most profitable option. But Arizona, Kansas, Maine, Missouri, and Pennsylvania give tax breaks for other education savings, including investments in the Independent 529.

Is there a fee or commission? Big upfront fees or commissions reduce the amount available for tuition. Most states offer parents the opportunity to invest directly in 529s without going through commission-paid brokers. But some states, such as Pennsylvania, charge investors fees just for maintaining an account.

Will a 529 investment affect a student's financial aid application or in-state tuition? A few states won't hold the value of 529 savings against students when deciding how much aid to award. And some states, including Alaska, Mississippi, and Texas, will charge students with prepaid accounts in-state tuition, no matter where they live.

Can you transfer the account to others? Most 529s allow parents to change beneficiaries, allowing other students to use the savings to pay for their tuition . But the rules are more complicated for transferring ownership.

When can you invest? Some state prepaid plans accept investments only a few weeks or months a year.

Are there any tuition discounts or surcharges? Some states are charging those who want to prepay tuition much more than current tuition prices. Some, such as the Independent 529 Plan, allow parents to buy tuition at prices slightly below (anywhere from a 0.5 to 4 percent discount) today's tuition rates.

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