529 Plans & Prepaid Tuition

• Contribution Limits
  You pay for amounts of tuition (years, credits, or units) in one lump sum or through installment payments. There are a number of options. Some prepaid tuition plans offer contracts for a two-year community college or a four-year undergraduate program, or a combination of the two, and can cover one to five years of tuition. Some states even allow the contract to be applied to graduate school tuition.
  
  

• Covered Educational Expenses
  With only a few exceptions, however, most prepaid college plans do not cover other expenses, such a room and board. So you may want to consider other college savings options to cover these costs.
  
  
• Residency Requirements and Other Limitations
  Unlike college savings plans, most prepaid tuition plans require either you or your child to be a resident of the state offering the plan when you apply. Some limit enrollment to a certain period each year. Many prepaid tuition plans also have age or grade limits for beneficiaries (i.e., future college students).
  
  
• Investment Options
  Prepaid tuition plans have no investment options. Under prepaid plans, the price of the contract is determined prior to purchase and usually depends on the type of contract, the current grade of the beneficiary, the current and projected cost of tuition, and the projected rate of return. These programs then pool the money and make long-range investments so that the earnings meet or exceed state college tuition increases. When a child is ready to go to college, the plan transfers funds to cover the tuition directly to the institution.
  
  
• Portability
  If your child chooses not to attend an in-state public college, all is not lost. Although you will not get the benefit of guaranteed tuition, all prepaid tuition plans allow you to use plan money to pay tuition at other colleges and universities. Many state prepaid tuition plans will pay out an amount equal to the weighted average tuition and mandatory fees at your state's public institutions, not to exceed the actual tuition and fees you incur. All prepaid plans also let you transfer the plan to a child's brother or sister (although age restrictions may prevent transfers to an older sibling). Unfortunately, if your child chooses not to go to college and a sibling doesn't use the plan, or you need to cancel the prepaid plan, most plans will only give you back what you originally contributed with a reduction or elimination of any interest earned. Some plans also charge a cancellation fee.

Source: Government Services Administration