College is expensive. Parents would feel better about investing for their child’s education if they could mitigate some of the future financial risks. Two of the most concerning risks: run-away inflation and fear of a student unexpectedly leaving college.
But these fears can be alleviated or even eliminated!
How? Prepaid college savings plans can help control future run-away inflation costs. And tuition insurance lets you get your money back if a student is forced to leave school mid-semester.
529 Prepaid College Savings Plans Lessen Future Inflation Risk
A 529 prepaid college savings plan is a tax-advantaged investment option designed to help families save for future college expenses. Unlike traditional 529 savings plans, which allow families to invest in a portfolio of stocks and bonds, prepaid plans allow families to purchase tuition at today’s prices to be used in the future: shielding families from the impact of tuition inflation.
Benefits of 529 Prepaid Plans
- Protection Against Rising Tuition Costs
- College tuition has historically increased at a rate higher than general inflation. Prepaid plans allow families to pay for tuition at today’s prices, avoiding the burden of future tuition hikes. This ensures that families can accurately budget for college expenses.
- Tax Advantages
- Contributions to 529 plans grow tax-free, and withdrawals used for qualified educational expenses are also tax-exempt. This allows for more significant savings over time compared to taxable investment accounts.
- State Support and Guarantees
- Many state-sponsored prepaid plans come with guarantees that protect families’ investments. Some states provide a safety net ensuring that the prepaid tuition credits will always cover the necessary costs, reducing financial risk even if market conditions change.
- Transferability and Flexibility
- If the designated student decides not to attend a participating school, the funds can often be transferred to another family member without penalty, or a refund can be requested. This flexibility ensures that the investment remains useful even if a student’s plans change.
By leveraging a prepaid 529 plan, families can safeguard their education savings against unpredictable tuition increases, ensuring they can cover costs without taking on excessive debt or financial strain. For more on 529 prepaid plans, check out this blog post and the corresponding My College Corner YouTube channel interview with Joanne Dashiell from PC529/CollegeWell.
While prepaid 529 plans help ease tuition inflation risk, they do not account for personal emergencies that may force a student to withdraw from college. Tuition insurance does!
Tuition Insurance Allays Current Financial Risk of a Student Withdrawing Mid-Semester
Can you imagine the stress caused by that dreaded phone call from your college student relaying the news that they need to leave college immediately? It may have been due to an accident, a medical issue, or a mental health crisis. The reason isn’t important. But the next steps are critical to stabilizing the student and protecting your investment.
As John Fees told us in this interview, tuition insurance may be the worst-named product ever because it covers more than just tuition. GradGuard’s program reimburses tuition, fees, room and board, as well as other costs of attendance for an upfront fee of 1.2% of the amount of the costs to be insured. For example, if a student is attending one of the more than 600 colleges participating in GradGuard’s program, a parent who purchases coverage with a value of $10,000, would pay a one-time fee of $120. Claims are paid if the student does not receive any course credit for the semester in which they withdraw as long as they provide documentation from a doctor who agrees that the withdrawal was necessary for the student.
Benefits of Tuition Insurance
- Financial Protection Against Unexpected Withdrawals
- Many colleges have strict refund policies, offering little to no reimbursement for tuition and fees after a certain period, often 4-5 weeks. Few offer any reimbursement for other costs of attendance such as room and board. Tuition insurance ensures that families are not left with a financial burden if a student cannot complete the semester.
- Coverage for Medical and Mental Health Issues
- Many students face unexpected health challenges, including severe illnesses or mental health crises. Tuition insurance covers withdrawals due to these medical reasons, offering peace of mind for families worried about their student’s well-being.
- Protection Beyond Tuition
- Tuition insurance policies generally cover additional expenses such as room and board, textbooks, and other fees. This comprehensive coverage ensures that families recover most of their education-related expenses in case of an unexpected withdrawal.
- Flexibility in Policy Options
- Tuition insurance policies vary in coverage and cost, allowing families to select the plan that best fits their needs. Some policies offer partial refunds depending on the withdrawal circumstances, while others provide full reimbursement.
By investing in tuition insurance, families can ensure that they are financially protected if unforeseen circumstances prevent their student from completing a semester, reducing financial strain and uncertainty.
Families who withdraw these funds from a 529 plan for qualified educational expenses could contribute the insurance proceeds to the student’s 529 plan with all the tax benefits of the original investment.
Comparing 529 Prepaid Plans and Tuition Insurance
Both 529 prepaid college savings plans and tuition insurance serve different but complementary purposes in managing the financial risks of higher education. While a prepaid plan locks in tuition costs and protects against inflation, tuition insurance safeguards against personal emergencies that could lead to financial losses. Here’s a comparison of how they address different risks:
| Feature | 529 Prepaid College Savings Plan | Tuition Insurance |
| Risk Mitigated | Tuition inflation | Unexpected withdrawals |
| Primary Benefit | Locks in tuition costs at today’s rates | Reimburses tuition in case of withdrawal |
| Coverage | Future tuition costs | Tuition, room, board, and other fees |
| Tax Advantages | Tax-free growth and withdrawals | No tax benefits, but prevents financial loss |
| Flexibility | Transferable to family members | Varies by policy and provider |
| Refunds | Refunds depend on state policies | Refunds based on withdrawal circumstances |
By utilizing both financial tools together, families can create a comprehensive risk management strategy that protects against both rising tuition costs and unexpected disruptions to a student’s education.
Conclusion
Paying for college involves significant financial commitment. Families must navigate tuition inflation and unforeseen life events that can disrupt education. 529 prepaid college savings plans and tuition insurance serve as critical tools in mitigating these risks. Prepaid plans protect against rising tuition costs, allowing families to lock in rates and avoid the burden of increasing expenses. Tuition insurance, on the other hand, ensures families are reimbursed in case of an unexpected withdrawal, preventing significant financial loss. By leveraging both strategies, families can create a more secure and stable financial foundation for their children’s education, reducing stress and ensuring access to higher education without unnecessary financial hardship.