Is your prepaid tuition plan safe?
Many states offer prepaid tuition plans, sometimes called 529 plans, as a way for parents and grandparents to save up for tuition costs. The plans allow parents to lock in current college tuition rates, and promises to cover the difference between current and future tuition.
But the recession is causing severe funding shortfalls in the plans. States like Alabama are now trying to reneg on paying the whole tuition bill, instead possibly forcing schools and families to make up the difference.
For now, states are paying tuition as promised, but some are using the fine print in the contracts to try and get out of paying tuition as agreed.
How can you avoid being burned? You need to read the fine print.
Five state plans are backed fully by the state. Others, including Illinois and Maryland, are required by law to consider covering the funds if there is a potential shortfall. But states including Alabama, Michigan, Nevada, Pennsylvania and Tennessee are backed by the funds' assets, which means if the funds run dry states don't need to rescue them.