Managing your financial life is not just about money.

Options for College Savings: Part 2

In the second part of my three-part series on college savings plans, I will go over the 529 Pre-paid Tuition Plan.

The 529 Pre-paid Tuition Plans are state-specific programs that allow the parent/grandparent to purchase “certificates” at a set percentage of the cost of today’s tuition, essentially allowing you to lock in today’s rates.

For example, if tuition at a Massachusetts public college is $10,000/year, you can buy a $1,000 certificate, which will pay 10% of the child’s tuition at any Mass public college in whatever year they attend (could be 18 years from now).

Below, I’ve included Information that is specific to the Massachusetts plan:

Pros of the 529 Pre-paid Tuition Plan

  • Locks in tuition at today’s rate. Research has shown that college tuition has historically increased at about twice the rate of inflation, or something like 6% annually.
  • If the child does not attend school in the state you have purchased from, you get your investment back plus nominal interest.

Cons of the 529 Pre-paid Tuition Plan

  • Certificates cannot be redeemed prior to “scheduled maturity.” They are NOT a liquid investment, and you cannot plan to use them before the child attends college.
  • Certificates only valid in the state from which you purchase them, at participating colleges. In Massachusetts, for example, there are 80 schools on the list.
  • The amount you receive back if the child does not attend college in the chosen state is capital plus interest, which is tied to the Consumer Price Index (inflation). Basically, you get back the future value of your investment, having earned only what inflation already took away.
  • You cannot purchase certificates for room and board.
  • Can only purchase once per year during the enrollment period.

Remember, you have other options as well. To see what some of them are, take a look at our other 2 articles in this series:

Part 1- 529 College Savings Account

Part 3- Uniform Gifts/Transfer to Minors Act




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