Although they offer principal protection, 529 prepaid tuition plans have certain shortcomings, as compared with 529 savings plans:
Tuition-only. Money accumulated in 529 prepaid tuition plans can be spent only on tuition (and perhaps mandatory fees). With 529 college savings plans, on the other hand, money can be withdrawn for additional qualified expenses, including room and board.
Only in-state schools. With most 529 prepaid tuition plans, money can be spent only at the sponsoring state’s public universities. In a few states, money can be spent at private universities–but still within the sponsoring state. If you put money into a 529 prepaid tuition plan and your child decides to go to a college that’s not covered, you might get your money back but you probably will receive a scant return on your investment, or no return at all.
One possible strategy is to use a combination of 529 plans. You might put enough money into your home state’s prepaid tuition plan to lock in full payment for four years’ tuition. In addition, you can contribute to a 529 savings plan for the same beneficiary. Under current law, tax-free withdrawals from the 529 savings plan can be used to pay for room and board, books, etc., while the other plan will pay tuition if the student goes to college in-state.
