With the stock market down significantly, some parents and grandparents are looking at safer ways to help a child or grandchild save for college. Prepaid 529 plans offer them (or any other family member) the opportunity to lock in tuition for the child at today's rates. These plans are gaining in popularity now that the market has reduced the value of some investment-based savings plans.
A prepaid 529 plan is usually operated by the state government, though some institutions may offer their own plans. 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 the plans won't increase in value, as a traditional 529 plan might, the tuition rates are guaranteed.
A downside of prepaid plans is that they are usually tied to the state's in-state tuition. If a child chooses a more expensive school, the family will have to pay the difference in tuition.
Traditionally, 529 savings plan -- plans that allow parents or other family members to invest money in the stock market for a child's education -- have been more popular than prepaid plans. The savings plans do not guarantee tuition, but they do have the potential for big gains in the stock market. However, with the recent market slide, the 529 savings plans have been losing value and parents have been reconsidering their options.
For more information on 529 plans, which can be a good way to give money to grandchildren, click here.