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Uncertain market makes prepaid 529 plans more attractive

With the stock market down significantly, some parents are looking at safer ways to save for a child’s college education. Prepaid 529 plans offer parents (and other family members) the opportunity to lock in tuition at today’s rates.

Up until now, traditional 529 savings plans have been more popular. These traditional plans allow parents or other family members to invest money for a child’s education tax-free, usually in mutual funds. But prepaid plans are gaining ground now that the market has dramatically reduced the value of many investment-based savings plans.

Prepaid plans are sometimes known as Prepaid Education Arrangements, or PEAs.

A prepaid 529 plan is usually operated by the state government, although some colleges and universities offer their own plans. Plans come in two basic flavors: unit or contract. Unit plans sell units that are a fixed percentage of tuition (e.g., one unit is one percent of tuition costs). Family members can buy as many units as they want each year. Contract plans allow family members to purchase a specified number of years of tuition. While the plans won’t increase in value as a traditional 529 plan might, the tuition rates are guaranteed.

A downside of prepaid plans is that they are usually tied to the state’s in-state tuition. If a child chooses a more expensive school, the family will have to pay the difference in tuition.

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