3 Myths About Prepaid College Tuition Plans Debunked

Purchasing tuition ahead of time is possible through a type of 529 college savings plan.

Parents and grandparents who want to guarantee future college costs can choose prepaid tuition plans, a special kind of college savings program that enables families to buy or make payments at a locked-in tuition rate for in-state public and, occasionally, for private schools. Prepaid tuition programs are currently available to new applicants in 11 states, College Savings Plan Network Chairman Michael Fitzgerald says.

While prepaid tuition seems straightforward, several plan characteristics are often misunderstood, experts say. Fitzgerald and Virginia College Savings Plan CEO Mary Morris tackle three of the most common myths regarding these programs:

[Read why more students choose two- and four-year public colleges.]

1. Students must live in the same state where their prepaid tuition plans are purchased: State residency requirements can be fulfilled by the person who opens the prepaid tuition plan or the beneficiary, the student who will use the plan, says Morris. For instance, the Virginia Prepaid Education Program requires either the plan holder or the student who will utilize the plan to be a Virginia resident. A grandparent could live in Florida and purchase a plan for a student who's a Virginia resident at the time of purchase. Or, if grandparents or parents live in Virginia, they can buy a plan for a Florida student, she says. And, Morris notes, a move after purchase of a contract is not a problem.

However, students who don't meet residency requirements for in-state tuition are charged the difference between in-state and out-of-state tuition and fees if they don't fulfill residency requirements at the time of college enrollment, Morris says. Individuals should confirm requirements with their state or the state where they wish to attend college, she notes.

2. You have to commit to prepaying tuition for all four years: Prepaid tuition plans vary by college terms purchased and price. Commitments range from a single semester to a specific number of years, Fitzgerald says. Prices vary based on the state chosen as well as by type of college: community college, four year in-state public school, or four year in-state private school, he says.

As an example of how much prepaid tuition varies in cost, 100 Texas tuition units bought through the Texas Tuition Promise Fund pay for 30 credits of education, equivalent to one traditional school year. The price is the same whether tuition units are redeemed in a year or 10 years from time of purchase.

However, tuition unit prices vary based on whether a student wants to attend a high priced, average priced, or lower priced Texas college. If purchased to attend the highest-priced Texas school, each tuition unit costs $115.92. For an average priced school, it's $82.92; community tuition units are $21.39 each. Buying a year of education ranges from slightly more than $2,139 to $11,592. Payment options for the units include one lump sum, an annual payment, or monthly payments.

[Take these steps before opening a 529 plan.]

3. You have to use the plan for in-state public schools: It's a common myth that prepaid tuition programs are only for parents who know their child will attend an in-state school. But according to Virginia College Savings Plan's Morris, prepaid tuition plan benefits can be used at any 529 plan-eligible educational institution, including private in-state colleges and out-of-state colleges, too, but the Virginia Prepaid Education Program contract may not cover full tuition and fees at those schools. The student at a non-Virginia public college is responsible for the difference between what tuition and fees cost and the amount the prepaid plan pays.

In addition to allowing prepaid tuition plans to be used for private or out-of-state schools, Virginia also allows prepaid tuition to be used for graduate school, although the benefit is based on undergraduate tuition and fees. This comes in handy for students who receive undergraduate scholarships.

"Every prepaid plan has policies that allow owners to use the plan at out-of-state schools and to roll over the account to a savings plan," says College Savings Plan Network's Fitzgerald. "It is always a good idea to check with the plan and read the enrollment materials prior to opening an account so you understand how the plan operates."

Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.