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Prepaid tuition plans

Prepaid tuition plan is a money term you need to understand. Here’s what it means.

What are prepaid tuition plans?

Offered through state 529 plans and private colleges, prepaid tuition plans are a way to pay in advance for a child’s college education. Parents locks in the current rate when they start paying, so they can avoid the higher tuition rate that they’d likely pay in the future.

For example, parents who pays for one semester’s cost of tuition at today’s rates for their 2-year-old would be able to pay at that locked-in rate for a semester’s worth of education when their toddler is old enough to go off to college.

Deeper definition

Typically, prepaid tuition plans only cover the cost of classes and don’t pay for room and board or other extra expenses.

In many cases, the parents or child must be a legal resident of that state, so they can’t buy a prepaid tuition plan of another state.

In choosing a method of payment, they can either pay for the entire cost of tuition at once or make regular payments through an installment plan. Prepaid tuition plans usually apply to community colleges as well as four-year universities.

There’s good news and bad news about prepaid tuition plans. The bad news is that only 11 states offer them. The good news is that several hundred private colleges have them.

When parents buy a prepaid tuition plan, they buy a contract that covers from one to five years of tuition. They can choose a community college, four-year university or a combination of both, if they prefer their child to take his or her first two years at a community college and finish a degree program elsewhere.

If the child wants to attend a different school than the one that the parents bought the plan for, they can still use the money even if that school isn’t covered by the plan. That’s because they can cash out their plan and use that money to pay for tuition at another college or university.

Even so, while the parents can use the money they invested, they don’t get the rates that they locked in when they bought the plan. Instead, they’ll pay the rates charged by their child’s college of choice.

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Prepaid tuition plan example

Dan and Bonnie bought a 529 prepaid tuition plan for their 3-year-old, Rosie, for the University of Florida, and paid money into the plan in installments every month. When Rosie turned 18, and decided to go to Florida and major in biology, they paid for her tuition at the 2017 rate.

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