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Get Your Money Out of Prepaid Tuition Plans

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Distributing funds from a 529 plan, a tax-advantaged college investment account, is the goal for all families who save for their children's education.

Prepaid tuition plans, a special type of college savings plan, take that goal a step further by guaranteeing money saved will cover the full cost of in-state undergraduate tuition, no matter how much tuition rises, says Joan Marshall, executive director of the College Savings Plans of Maryland. Parents choose a payment plan based on a set price for future tuition. Plans are available for new enrollment in nine states, according to the nonprofit College Savings Plans Network.

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"My parents bought Florida's prepaid plan when I was a baby," says former Florida State University student Jennifer Castro. She earned a scholarship at community college and then used her prepaid tuition credits to complete a double major at FSU. Distribution was easy: All she had to do was present her ID card at the bursar's office when she registered for classes.

But each state may have its own process for paying tuition credit, Marshall says. When families are ready to use their prepaid plans, they should do the following three things.

1. Understand how much tuition is covered: Parents who purchase tuition credits should find out the exact amount of tuition and fees the credits will cover for the school their student has chosen, Marshall says. Prepaid tuition programs generally pay tuition and fees at an in-state university for the amount of tuition credits purchased.

However, for some prepaid tuition plans such as those offered in Florida, Maryland, and Washington, out-of-state tuition is paid at the same rate as the in-state school with the highest tuition. Families are responsible for any remaining tuition.

For instance, if the highest in-state tuition was $8,000 per year and the student's private or out-of-state school tuition was $16,000 per year, these plans would pay $8,000. The family would be responsible for the other $8,000.

But that's not true of all plans. In Texas, parents are not guaranteed the full value of in-state tuition applied to out-of-state tuition. The amount paid toward out-of-state tuition is the lesser of either a weighted average of Texas public school tuition or the amount paid into the plan plus any earnings or losses.

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2. Find out about the distribution process: Parents need to contact the plan manager to find out their state's procedure, Marshall says. In Maryland, parents must send in an invoice and filled-in claim form by mail or E-mail, she says. The claim form is available on the plan's website.

In Washington, the whole process may be completed in one transaction. Parents can log in to the plan's site online, choose the school where the funds will be distributed, and request the first distribution at one time, as long as the school is already in the system, says Betty Lochner, director of the state's Guaranteed Education Program. All Washington state schools are already in the system, she says.

3. Start early when ready for distributions: Start as soon as school invoices are available, Marshall recommends. Often parents wait until the day before the tuition is due to request funds, but payment times may vary based on the university and the plan, she says. In Maryland, it can take up to 10 days after a claim form is submitted for the payment to be sent.

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The biggest mistake she sees is parents paying tuition with a student loan and then requesting reimbursement; 529 plans cannot be used to repay student loans, only eligible education expenses, she notes.

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

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