A prepaid tuition plan allows you to pay now, at today's rates, for school tomorrow. In return, your account (or contract as it's often known) is guaranteed to pay for the tuition and fees at participating public universities and colleges by the time your child graduates from high school.
A prepaid plan can help protect you from tuition inflation and stock market fluctuations, but they do not typically cover the costs for room and board. The funds are federally tax free as long as the money is used for qualified higher education expenses. These plans offer some flexibility, including the ability to switch the beneficiary to an eligible family member, such as the beneficiary's siblings, step siblings and first cousins. You are limited to the school(s) participating in the plan you choose. Some states have also reported that their prepaid plans were seriously underfunded.