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What’s the difference between a 529 prepaid tuition program and a 529 savings program?

Published: 08/23/2008
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Prepaid Tuition: Essentially, parents, grandparents, and other interested parties may purchase future tuition at today’s rate. The program will then pay the future college tuition of the beneficiary at any of the state’s eligible colleges or universities (or comparable payment to private or out-of-state institutions). Amounts of tuition (years or units) may be purchased through a one-time lump sum purchase or monthly installment payments. The program pools the money and makes investments to enable the earnings to meet or exceed college tuition increases in that state.

Savings: Savings plans (also known as investment plans) enable participants to save money in a college savings account on behalf of a designated beneficiary. Amounts contributed and any earnings on the account may then be used to pay the beneficiary’s qualified higher education expenses. Contributions can vary, depending on the individual savings goals. The plans offer various investment options that provide a variable rate of return usually based on stock or bond funds, although some plans offer investment options that guarantee a minimum rate of return.

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Differences Between the two 529 Plans

Submitted by Anonymous on Sat, 09/26/2009 - 15:14.
The real differences are basic. The prepaid tuition plan is a contract. You buy credits and the state treasurer will guarantee the tuition will be paid when your student enters college. The risk has been transferred to the state. 529 prepaid tuition plans are only good for tuition and grow at the rate of tuition growth in your state. 529 savings plans are different in that you have the investment risk and reward. If the fund you choose grows then you will not have to pay tax on the growth if you use the money for "qualified education expenses". The definition includes tuition, fees, room, board, books, supplies, (and computers and software just added by the Recovery and Reinvestment Act of 2009). The savings plan is a parent asset for need analysis purposes when using the federal methodology (FAFSA) and the prepaid tuition plan is excluded from need analysis per the College Cost Reduction Act of 2007 although the FAFSA incorrectly still asks for it on page 5. Check it out. Robert Stevenson, CPA