Chapter 5 - Prepaid Tuition Plans vs. Savings-Type Plans

Every QSTP falls into one of two general types, a prepaid tuition plan or a savings-type plan. A prepaid tuition plan is one in which you purchase tuition credits or certificates that entitle the beneficiary to a waiver or payment of future qualifying college costs. In essence, you are paying now for college expenses in the future, and by doing so you protect yourself from future price increases. A savings-type plan works more like any other kind of tax-deferred investment, such as an annuity or an individual retirement plan. Your contribution establishes an account that fluctuates in value as determined by the underlying investments. The idea is that the account will grow in value over the term of the account to adequately handle future college expenses.

…. The type of plan you choose is important, because there are significant differences between them. Most people evaluating alternative QSTPs will, quite naturally, focus attention on the investment aspects of the programs being considered. After all, we all want our investments to do all well as possible. Historically, over long periods of time, stocks have generally outperformed other types of investments, and certain types of stocks have done better than others. On the other hand, stocks generally entail more investment risk than fixed income securities.