Future Debt Relief | Parents Open Prepaid Tuition Accounts

Wednesday, May 21st, 2014 By

Parents worried about college funds

Do thorough research before starting a prepaid tuition plan.

Do thorough research before starting a prepaid tuition plan.

Parents worried about debt relief in the future may see their children’s college funds as a huge obstacle to overcome. Many parents are nervous because of the economy and wondering how they are going to handle putting their children through school. Mary Connelly, a single parent in Boston, Mass., stated, “I can barely handle the cost of sending my children to private schools now. I don’t see how I’m going to manage in 10 years from now considering tuition goes up every year.”

For parents planning college education funding, there are  options available. One is the prepaid tuition plans that are available in several states. The plans work to allow parents to purchase schooling, at current tuition rates, and then apply it to future costs. Parents are also allowed to defer paying federal income tax on earnings until the money is withdrawn.

Prepaid tuition plans are attractive for many parents because they are a little different from college savings plans. College savings plans offer higher return rates that are not influenced by college tuition. Though the return could be greater, there is an added risk that the overall investment could lose value over time.

How prepaid tuition works

Each state dictates how the prepaid tuition account works, but the general rules are that parents and relatives are allowed to purchase tuition at today’s cost. They can either pay the total cost immediately or pay in installments. The investments are guaranteed to compensate for higher costs of college in the future. This is a great way for parents to be able to channel money into their own retirement savings, debt relief and bills, while knowing their child’s college costs are paid for. The other benefit is that anyone can contribute to the plan at any time.

Questions to ask

There are some issues to be sorted through when investing in prepaid tuition plans. Parents should be well versed in the following:

  • Can the account be transferred? When can it be transferred?
  • When is the enrollment period?
  • What costs are covered in the plan?
  • If parents stop paying, what is the penalty?
  • Is there a difference between choosing a private or out-of-state college?
  • How are taxes affected?

What about the risks?

Though the prepaid tuition account is beneficial, there are things to consider. First of all, the returns on these accounts normally pales in comparison to investments in stocks. If parents start saving for college when a child is in grade school, stocks can be a better option. Normally the prepaid tuition account is an option parents choose when they have waited until the child is in high school to address college expenses. By this time stocks probably won’t mature enough in time to pay for college.

Also, prepaid tuition accounts lack flexibility. Enrollment out-of-state could hamper full benefits of the account. This is why it’s imperative for parents to understand all the nuances of the plan they choose and the “what ifs” involved. Another issue is if children opt to not go to college. Taking out the money and not spending it on tuition could come with a severe penalty. These accounts are notorious for their strict refund policies.

College funding in the future

The prepaid tuition plan is a great option for parents who are worried about the rising costs of college in the future. They offer peace of mind for parents and give them other options with their money while their children are finishing school. They won’t have to scramble to fund college, and they can put their oney toward debt relief, retirement savings and bill management. Prepaid tuition plans can be useful if researched and decided upon wisely.

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