Education Planning Common Questions |
What's the difference between state savings plans and prepaid tuition plans?
Answer
Although both state savings plans and prepaid tuition plans are 529 plans (assuming they meet the statutory requirements), there are important differences between them.
The main difference is that with a state savings plan, you contribute to an individual account to pay for a child's future education. Your money is invested in a particular investment portfolio at the time you join the plan, and you take your chances on what your rate of return will be – there are no guarantees. If your portfolio performs well, you reap the benefits. If it doesn't, you suffer the losses.
By contrast, with a prepaid tuition plan, you prepay all or part of a child's future tuition by investing in units or contracts (depending on how the particular plan is structured), and you're guaranteed a minimum rate of return. However, you aren't necessarily entitled to any extra money that the plan may earn.
There are other important differences, too. A state savings plan lets you use the funds at any college home or abroad that's accredited by the U.S. Department of Education, while funds in a prepaid tuition plan may typically be used only for undergraduate tuition at public colleges in your state. Also, there is generally no time limit on when withdrawals from a state savings plan must be made, though tuition credits in a prepaid plan must generally be used by the time the beneficiary reaches age 30. However, one big difference between state savings plans and prepaid tuition plans has disappeared: their federal financial aid treatment. As of July 1, 2006, both types of plans are treated the same – as an asset of the parent if the parent is the account owner. Previously, a prepaid tuition plan was treated more harshly under the federal aid formula.
