Section 529 of the U.S. tax code also authorizes
prepaid college tuition plans. If you invest for college in this
way, you buy tuition credits at today’s prices to cover the
cost of tuition in the future. You can either invest a lump sum
or purchase the credits gradually. There’s no federal income
tax due when the credits are used, even though the tuition bill
will probably be higher than the amount you paid for the credits.
Prepaid tuition plans are offered by states
or by private colleges and universities. A private college plan
limits use of the credits to the sponsoring institution, but if
you’re enrolled in the state’s plan, you can use the
credits at most public institutions in the state. Your child may
even be guaranteed admission to at least one eligible school.
Read the fine print
If your child prefers to attend college somewhere
else, the plans may allow you to transfer the value of your contract
to a private or out-of-state school, though there may be a penalty
for transfers. Or you may forfeit the increased value of the credits
and get only your investment back.
If your child decides not to go to college
at all, and you want to get your money back, you’ll face
tax penalties. You can avoid that penalty by switching the
beneficiary
of the account to someone who will use the credits. But be sure
you know the rules before you sign up.
Buyer Beware
A challenging investing environment and rising college costs mean that some prepaid
tuition plans are facing budget shortfalls. Many plans are guaranteed by the
full faith and credit of the state that administers them, but others aren't.
Before you invest, look into whether the contract guarantees that your investment
will cover future education costs. It's also smart to familiarize yourself with
the plan's refund policy.
