How Do Prepaid College Plans Work?

With the significant increase in the cost of education after the economic recession, meeting the expenses for higher studies has become a cause of concern. Sometimes grant or aids received for funding education costs is not enough and accepting student’s loan becomes unavoidable.

If you want to avoid paying the interests for education loan, getting the right saving plan is a must. Apart from that, supporting the education needs with prepaid college plans can also be a good choice, provided you are familiar with the basics of the plan.

What is Prepaid College Plan?

To know, how the prepaid college plans work, one should have the understanding of some basic facts related to prepaid college plans. Prepaid tuition plans or prepaid college plans refer to a financial scheme for supporting education in which parents can make tax free investment for their child’s education.

Compared to other saving plans, this is known for its low risk. Yet, proper planning of child’s education expenses is necessary if someone wants to get the best help from these savings plan.

How Prepaid College Plan Works?

When you are planning to accept prepaid college plans to meet any sort of educational expenses, you should at first know whether this plan is accepted in your state or the state where your child intends to study or not. You can check this with the educational institutions of the state and proceed accordingly.

Once you check out the basic guidelines, you need to determine the requirements and purchase the credits when the child is in school. As soon as your child is enrolled in a college or a university, you can use the credit to receive the funds for supporting same amount of expenses.

The best part is, the money that is deposited in this account can be transferred to the account of other student or one can also claim for refund if the child does not enroll for college course. Therefore, the money that is saved in this account can be put to some other use.

Money invested in prepaid college plans are exempted from Federal Income Tax. In some places, State Income Tax is also not charged on the money saved in this plan. Yet, income tax is applicable if the money is withdrawn from the account and is used for meeting expenses in any other field, apart from education.

Parents who are looking for prepaid college plans may also like to know that this investment scheme is divided into two different types. Depending on your requirements, you can go for prepaid unit plan or contract plan. In a prepaid unit plan, you can purchase as many units as you think will be enough for meeting the cost.

Note that each unit purchased will worth one percent of the tuition fee for the year. In case of contract plan, one needs to purchase credits for a specific period [years] at the prevailing price. One can make the investment in parts or as a lump sum. The price of contract generally depends on the age of the child and increases with child’s age.