529 Prepaid Tuition

With the cost of tuition rising faster than the rate of inflation, it's amazing that anyone can afford to pay for a college education. What you started saving for 3 years ago looks even bigger and nastier now. So what can you do to save for college? Your friendly neighborhood state government might have the stopgap solution you're looking for.

Basics and benefits

Section 529 of the Internal Revenue Service Code offers two types of state-sponsored plans to help finance your college education. One of these options is the prepaid tuition plan. Under the program, students and their parents purchase future college or university credits at current prices. Even as tuition increases, the state government will guarantee the initial rate and subsidize the difference later, regardless of inflation.

Investing in a prepaid tuition plan is a relatively safe way to save money, since the state and participating schools assume most of the financial risk. But remember to consult with a financial advisor before deciding on your participation.

Don't forget the fine print

Like every investment option, 529 prepaid tuition plans have their limitations. While each state has its own set of stipulations, don't expect to the prepaid credits to carry over if a student decides to attend an out-of-state college. At worst expect a refund of the 529 plan contributions, minus nominal fees and interest accrued over time.

Only 18 states offer prepaid tuition plans, most of which are restricted to in-state residents. However, as 529 plans have grown in popularity, more private schools are participating in the state programs or offering similar plans of their own. Because of the restrictions involved, make sure to research your state's plan and its limitations before you start investing.

What's not covered

While prepaid tuition plans will cover the actual costs of classes a students takes, there are many more expenses related to university that you'll have to save for separately. These plans won't include room and board, books, spending money, or any of the various other expenses that contribute to college costs.

To save for these costs, you might want to consider the Coverdell Educational Savings Plan or 529 Savings Plan, both tax-free ways to save for general education expenses.