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The Short Answer

Should You Be Worried About Your Prepaid 529 Plan?

If your plan is facing a shortfall, consider following these steps.

Question: I've got money invested in my state's prepaid 529 plan, but I know that some states have struggled to meet their obligations. Is my money at risk?

Answer: During times of economic uncertainty, anything that comes with an element of "guarantee" seems attractive--particularly for parents who want to help fund their children's college tuition. To this end, prepaid 529 plans propose a compelling offer amid quickly rising college costs and a volatile investment climate: Insure against tuition inflation by purchasing future college credits in advance at a set price (usually slightly above today's tuition prices) and receive a tax break to boot.

With tuition rates increasing about twice the general rate of inflation--or about 8% on average--a plan that promises to keep pace with tuition inflation sounds promising. But this guarantee might not be as airtight as it seems. Once touted as a worry-free way to fund your child's college education, prepaid 529 plans are beginning to look less infallible, as some states' plans have struggled to keep up with tuition hikes and recover from losses incurred during the 2008-09 market downturn.