Potential Advantages:
The guarantee that a college fund will be adequate to cover the cost of tuition is a comfort to many parents. By using a prepaid tuition plan, parents and grandparents do not have to worry about choosing the right investments or the effects of a bad economy.Section 529 Prepaid Tuition plans allow for a parent or donor to remain in control of the assets indefinitely, even allowing them to close the plan and get their money back (subject to penalties).
Additionally, the Section 529 Prepaid Tuition plans provides for in-state income tax deductions for 33 different states, as well as being shielded from a number of state’s financial aid calculations.
Potential Disadvantages:
The biggest disadvantage of the Section 529 Prepaid Tuition plan is the lower investment rate of return. Often these plans only grow at an annual rate of 5-6%. This is an expected trade-off for the higher level of safety offered by these plans.Another disadvantage is the significantly lower contribution maximums than the Section 529 “savings” plans, as well as the fact that many of the prepaid tuition plans do not cover room and board.
Lastly, the prepaid tuition plans usually put a time limit on when the funds must be used by. For example, a prepaid tuition plan might require that a student begin using their prepaid tuition by the 10th year after they graduate high school.
