As ElderLawAnswers reported earlier this year, the uncertain stock market has made prepaid 529 plans more attractive to parents looking to save for their children's college education. However, the same economic problems that have increased the popularity of the plans are also putting the plans in jeopardy. Many plans are running out of money, causing states to impose higher fees or consider shutting them down.
A prepaid 529 plan is usually operated by the state government, though some institutions of higher learning may offer their own plans. Prepaid 529 plans offer parents the opportunity to lock in tuition for their child at today's rates. There are two different kinds of plans: unit or contract. Unit plans sell units that are a fixed percentage of tuition (e.g., one unit is 1 percent of tuition costs). Parents can buy as many units as they want each year. Contract plans allow parents to purchase a specified number of years of tuition. While prepaid 529 plans won't increase in value, as a traditional 529 plan might, the tuition rates are guaranteed.
The stock market slump combined with rising college costs are causing many of the prepaid plans to lose money. According to an article in The New York Times, all but two of the 18 prepaid plans in existence do not have enough money to pay all of their future tuition obligations. States are taking a number of steps to deal with these losses. Texas is reducing the payout to children who choose not to attend college in Texas, Pennsylvania has begun imposing premiums on investors, and Alabama has closed its plan to new members.
At the same time, SmartMoney reports that "529 Plan Fees Are Dropping."