So-called 529 college savings plans really are investment plans because your account will grow (or shrink) depending on how specified investments perform. Some states, though, also offer prepaid tuition plans that guarantee a return that will match in-state tuition increases.
Even though you are effectively protected against investment losses, with 529 prepaid tuition plans, they offer the same federal (and, in many cases, state) tax advantages as 529 savings plans. With 529 prepaid tuition plans, you effectively buy a certificate that entitles you to a certain amount of future tuition.
Suppose, for example, tuition at your state university is now $10,000 per year. You invest $4,000 in your state’s 529 prepaid tuition plan, naming your newborn daughter as the account beneficiary. In most states, such a payment will entitle her to 40 percent of a year’s tuition.
Suppose tuition at your state university rises to $40,000 by the time she is an 18-year-old freshman. (That would be an 8 percent annualized increase.) The 40 percent certificate you buy for $4,000 this year would entitle your daughter to 40 percent of a year’s tuition, worth $16,000 in the 2021-2022 academic year.
