The National Directory of Certified Public Accountants

Ask A CPA - College Planning & Financial Aid

What Are Prepaid College Tuition Plans ?

Some colleges now offer prepaid tuition plans. Generally, you agree to pay a lump sum amount today and, in exchange, the college will guarantee your child four years of already prepaid education. Earnings on the plan's investments are tax-deferred. When the plan pays the tuition benefit, the difference between the purchase price and the benefit will be taxed. If the funds are used for qualified higher education expenses, the investment earnings will be included as part of the beneficiary's income, therefore the earnings will be taxed at the student's usually lower tax rate rather than the purchaser's usually higher tax rate.

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