Smart New Ways to Save for College

These plans, also known as Prepaid Education Arrangements, give families the advantage of locking in public, in-state college costs at today’s prices. The plans vary in cost depending on how many years you have before your child goes to college, so the earlier you get started the better.

The prepaid college plan is recommended if you prefer a guaranteed, low-risk savings plan. The risk involved is minimized due to the value of the investment being guaranteed by the state to meet the costs of the annual in-state public college tuition. Most plans allow a student to attend out-of-state colleges but only fund at the in-state college rate, with parents paying the difference. These plans also offer tax-free benefits on qualified withdrawals. Prepaid college plans are becoming more attractive to compete with the various other savings plans available.

Drawbacks to prepaid college plans include limiting participation to state residents. Another disadvantage is that room and board costs may not be covered. Depending on the state, some plans only fund tuition and fees, while other plans allow excess funds to be used for room and board, or they have a separate room and board plan.

For example, the Florida Prepaid College Plan offers three different tuition plans, a fee plan, and a dormitory plan. The tuition plans include a four-year university, a plan that covers two years community college and two years university, or a two-year community college plan. The dormitory plan pays for the cost of a standard, double-occupancy dormitory room at a Florida university or other university-held housing, but it is only available for children in the eighth grade or younger. Also, most universities designate certain dormitories to Florida prepaid students and there is no guarantee that the student will receive a room as it is assigned on a first-come, first-serve basis.

Another potential disadvantage is that some states have penalties for canceling the plans, including cancellation charges and/or loss of interest. Some plans do not have cancellation penalties, and parents can get a refund for any reason. Be sure to check with your state’s prepaid college plans to learn more.