|What's the difference between college savings plans and prepaid tuition plans?|
Although both college savings plans and prepaid tuition plans are 529 plans (assuming they meet the statutory requirements), there are important differences between them.
The main difference is that with a college savings plan, you contribute to an individual investment account to pay for a child's future education. Your money is invested in a particular investment portfolio at the time you join the plan, and you take your chances on what your rate of return will be--there are no guarantees. If your portfolio performs well, you reap the benefits. If it doesn't, you suffer the losses.
By contrast, with a prepaid tuition plan, you prepay all or part of a child's future tuition by investing in units or contracts (depending on how the particular plan is structured), and you're guaranteed a minimum rate of return. However, you aren't necessarily entitled to any extra money that the plan may earn.
There are other important differences, too. A college savings plan lets you use the funds at any college home or abroad that's accredited by the U.S. Department of Education, while funds in a prepaid tuition plan may typically be used only for undergraduate tuition at public colleges in your state. Also, there is generally no time limit on when withdrawals from a college savings plan must be made, though tuition credits in a prepaid plan must generally be used by the time the beneficiary reaches age 30. And while you can generally contribute to a college savings plan at any time, prepaid tuition plans typically have select open enrollment periods, which are the only times you can open an account or contribute money.