Prepaid Tuition Plan

What Is A Prepaid Tuition Plan?

A prepaid tuition plan allows parents and donors to pay part or all of their child’s future college costs today.

Deeper Definition 

Prepaid tuition plans are an attractive savings option for parents who are saving for their children’s education. The plan allows them to pay part or all future tuition fees at today’s presumably lower rates.

The plan requires parents or donors to pay a portion or all the cost of tuition for their entire degree program in advance of starting school. Payments can be a one-time payment or an approved installment plan. Typically, the plan covers only tuition expenses and excludes other costs such as hostel or health care fees.

Most prepaid tuition plans cater to undergraduate study, but a few apply to graduate studies as well. Broadly, there are two kinds of the plan:

1. State-Sponsored Prepaid Tuition Plan: It is a plan that allows parents, grandparents, and others to contribute money to tax-advantaged savings accounts aimed at paying for college. The contribution can start several years in advance to when a child would be ready for college.

Usually, there is a residency requirement attached to this plan. To qualify for prepayment, would-be account holders must be residents in the state. The goal of this plan is to fund the tuition fee of the state-owned college. However, if the program’s beneficiary decides to attend college elsewhere, they can withdraw the funds at a predetermined valuation rate.

2. School-Sponsored Prepaid Tuition Plans

The school offers a prepaid tuition plan and allows parents to pay for their children’s education before enrollment begins, unlike the state program offer years in advance.

Each school has its criteria for who qualifies for the program and how it should run. Some schools require parents to pay the full tuition fee for the degree program at once.

Prepaid Tuition Plan Example

The tuition fee for a law degree at a state-owned college is currently $84,000. Five years ago, it was $67,000. A parent who wants their child to study law in that school enrolls for a prepaid tuition plan and pays the full tuition fee. Six years later, when the child is ready to attend college, the school tuition fee stands at $90,000. Because the parent already cleared the tuition fee years ago, they saved $6,000.