An Evaluation of 529 Savings and Prepaid Tuition Plans

The pui*pose of this thesis was to evaluate the two types of Internal Revenue Code (IRC) 529 college savings plans; the savings plan and the prepaid tuition plan. The investment returns of the college savings plans and, indirectly, prepaid tuition plans were compared to the current tuition inflation environment to determine which method provided the investor the most favorable return. In addition, the circumstances surrounding prepaid plans that have recently closed to new enrollment were used to evaluate the condition of the prepaid alternative. A sample of state college savings plans returns were examined along with four currently suspended prepaid tuition programs. Two operating prepaid programs, Mississippi and Florida, were also highlighted. A nation-wide observation of college tuition inflation as well as a focus on tuition inflation in the state of Mississippi was used as a benchmark. The results show that college savings plans often do not provide the ideal investment vehicle during times of rampant tuition inflation. Returns provided by the savings portfolios may not be able to keep up when tuition inflation is multiple times more than general inflation. Prepaid plans aie also affected by a turbulent tuition environment. When tuition increases an abnormally high amount from year to yeai* the plans risk not being able to fund future tuition promised to investors. This situation the future tuition liabilities to far exceed the assets of the program. This reality has forced some plans to discontinue offering their services. In conclusion, the best 529 investment vehicle during times of extravagant tuition inflation is the savings plan purchased for a beneficieiry who is at a very young age. This causes allows the investment to overcome periods of aggressive inflation. In addition, the continuity of the savings plan is not threatened by these external conditions offering investors more security when managing their children’s education resources.