If you’ve got children who are heading back to school this August you probably can’t help but think that this is just another year closer to them heading off to university. Or maybe you’ve just had your first child, but you’re already stressing about how you’ll one day be able to afford to pay for their higher education. Two popular options to allow parents to start saving for college are prepaid tuition plans or a 529 plan. While both are good options which is better for you will depend on how exactly you’re looking to save. Here are the pros, the cons, and the breakdown of both:
State Offered Prepaid Tuition Plans
Some states (Florida being one of them) offer guaranteed prepaid tuition plans which lock in tuition rates at a lower cost of what they are sure to be in the future. According to savingforcollege.com tuition rates have increased by an average of 5% a year over the past decade. If this pattern continues (and it’s likely that it will) locking in lower tuition rates could mean the difference between your child being able to reasonably afford to attend college or not. Your payment options include paying a lump sum or paying in monthly installments, which would allow you to gradually save some of your earnings over a number of years. However, the downside to prepaid tuition plans is that there’s a penalty if your child opts not to go to an instate public school. If they choose a private school or an out of state public school the penalty will be either a set fee or weighted payments dependent on the school’s tuition rates. Either way it means that the money that was saved up will not reach as far. Prepaid tuition plans might be a more complex option if you want your child to have full flexibility to pick their school.
A 529 plan allows not only parents to start saving for their child’s education expense, but also anyone else who might wish to contribute. With your child named as the beneficiary they would be allowed to pay for any qualified education expenses at any school they wish to attend. This means that, unlike prepaid tuition plans, they can also use the money to pay for books, dorm living, or meal plans paid directly to the school. With the beneficiary having full freedom to choose where they want to go to school it would be less likely that any money would be wasted. However, you will not have locked in tuition rates like you would with prepaid tuition plans, so you will end up paying the inflated rates of years to come. Overall 529 plans offer much more flexibility, but you are more likely to end up having to pay more in tuition.