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What is a Prepaid College Tuition Savings Plan?

Jun 3, 2012

Investing for college can be confusing. There are hundreds of different plans to pick from. You can chose your own states college savings plan or go to another states plan. But basically before you pick where to place your college savings you need to pick what type of plan is going to suit the goals you have.

There are two ways to save for college, a pre-paid tuition plan or an investment program where your savings will grow according the rate of return of the plan you chose.

Prepaid Tuition Plans

Prepaid tuition plans allow a parent, grandparent, or family friend to establish an account in the name of a student to “lock in” the cost of a specified number of academic periods or course units in the future at current prices, typically at the public colleges and universities located in the state sponsoring the program. For example, if an account holds shares worth two years’ tuition, these shares will always be worth two years’ tuition even several years later when tuition rates may have doubled. The account may be funded by a lump sum or periodic cash payments.

There are two main types of prepaid tuition plans—prepaid units and contracts. Prepaid unit plans sell units representing a fixed percentage of tuition. While the price of a unit may increase each year, once purchased, the unit remains valued at the same percentage of tuition it had when originally purchased. Under a contract plan, participants agree to purchase a specified number of years of tuition and mandatory fees and/or room and board. The purchase price depends on the age of the child, the type of payment (lump sum or installment), and the number of years or units purchased. Contract plans usually offer lower prices for younger children because the state has more time to invest the money.

Prepaid tuition plans provide a hedge against tuition inflation and enable the state to pool money to make long range investments so that the earnings meet or exceed college tuition increases. Most prepaid tuition plans also have some type of guarantee from the state, ranging from full faith and credit obligations to a statutory guarantee. The specifics of prepaid tuition plans vary greatly from one state to another.


  1. I think I may prefer the investment option as it would allow my child more choices when the time comes.

  2. Some people aren't as sure as you are. They want the certainty of the prepaid but want the possible growth in the investment option. Maybe do both?


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