A 529 investment account is better than a prepaid tuition plan.
Prepaid tuition plans (which lock in future post secondary tuition at today’s rates now) generally have fewer qualified schools, more fees, and offer less flexibility, compared to the 529 investment plans which can cover a wider array of education expenses. Prepaid investment rules and formulas can be difficult for the lay investor to understand. The selected investments are also generally more conservative, resulting in overall lower earnings.
A 529 investment account can be used for a large variety of post secondary school types throughout the US and many foreign countries. Invested 529 funds can be used after college or vocational school as well, throughout the student’s life. While prepaid plans in theory adjust to growth associated with tuition rates, 529 accounts give your money the potential to grow at higher return rates through market investments. For the risk-averse clients who have in the past favored prepaid plans, a financial advisor can structure a 529 account with lower-risk investments that may still outperform the actual rate of return of a prepaid tuition plan.
Because tuition at various public and private institutions is quite different and because some “hybrid” prepaid tuition plans can also be used for similar qualified expenses of 529 plans such as K-12 expenses, understanding a deposit’s future value can become complex.
the Massachusetts prepaid program allows you to buy “tuition credits” for future tuition and mandatory fees at near 70 Massachusetts institutions each July 15th. These are made to be percentages of full-time credits for a full year. Participants will need to save at least $300 over the course of the year to qualify for the tuition lock-in. You can only save in this program through the beneficiary’s sophomore year in high school, as the savings need 5 years to mature after investment. Earnings are state and federal tax free with qualified uses. Funds must be used within six years of a picked start date. If a school outside of the program (such as an out-of-state institution) is chosen there is no penalty, but your money is returned only at a low rate, the consumer price inflation index (CPI).
The Massachusetts plan has numerous change or early withdrawal fees associated. There is no K-12 expense option. The percentage interest earned depends significantly on the per year investment and the school chosen, with rates for a $1,500 investment locked in near 2.46-7.21% and for a $3000 investment 4.12-14.42%. For participating schools and rates, link: https://www.mefa.org/ways-to-save/mefa-u-plan/#participating-schools
Within the more hybrid Pennsylvania’s PA 529 prepaid GSP account, the primary difference from the state’s offered 529 investment plan is the method of growth. Contributions used for qualified education expenses grow based on postsecondary tuition inflation, not based on investment performance.
The concept of the prepaid program is that if you save enough for postsecondary tuition today (whether a credit, a semester, or four years) at a certain “Tuition Level”, you will have enough funds to cover that amount of tuition at that same level in the future–no matter when or how much postsecondary tuition has increased in the meantime. Even if the investment value of your contributions has actually gone down the GSP Fund is still obligated to pay for a student’s college expenses at the tuition-inflation value.
Fees of guaranteed funds are generally higher than the investment 529 accounts. “Eligible Educational Institutions” for the GSP account’s qualified expenses are similar to investment 529 plans, including elementary or secondary public, private, or religious schools, as well as most American and many foreign colleges, universities, and trade schools.
When you open a PA 529 GSP Account, you are asked to designate a school “Tuition Level”. However, you may change your choice at any time. Tuition levels from which you may choose include five average levels as well as some specific publicly-funded postsecondary schools:
State-Related University Average, based on average tuition at the four State-Related universities.
State System of Higher Education Average, based on average tuition at 10 of the universities that comprise Pennsylvania’s State System of Higher Education.
Community College Average, based on average tuition at Pennsylvania’s 14 Community Colleges.
Ivy League School Average, based on tuition at the eight Ivy League schools.
Private Four-Year College Average, based on average tuition at four-year private Pennsylvania colleges (excluding nursing schools).
For each Tuition Level, a “GSP Credit Rate” is set by the PA 529 GSP each academic year. For each contribution made to an Account, the number of “GSP Credits” attributable to that contribution is calculated by dividing the account contribution by the GSP credit rate in effect. A GSP credit is not the same as an academic credit.
No statement or example on this site should be considered a specific recommendation for your personal situation. Investing and tax strategies each carry significant risks. Examples herein may not apply to your situation. Please consult your estate attorney, tax advisor, or financial advisor for personal advice.