Maryland Prepaid College Trust: A Comprehensive Overview

Saving for college can seem like a daunting task, but with the right tools and strategies, it can be achievable. One such tool is the Maryland Prepaid College Trust, a 529 plan offering unique benefits and features. This article provides an in-depth look at the Maryland Prepaid College Trust, exploring its advantages, contractual features, tax benefits, and how it compares to other college savings options.

Understanding Prepaid 529 Plans

If you have any familiarity with college savings, you’ve most likely heard of 529 plans. While most people are familiar with 529 savings (or investment) plans, prepaid 529 plans are lesser-known. Unlike traditional 529 plans, where your savings are invested and exposed to normal market conditions, prepaid 529 contributions, usually in the form of tuition certificates or credits, are guaranteed by a state or participating colleges. When your child is ready to attend college, the plan pays tuition at the current rate. Since most of these plans are offered by states, the prepayment typically applies to in-state colleges and universities, although in most cases funds can be used outside the network of colleges.

What is the Maryland Prepaid College Trust?

The Maryland Prepaid College Trust is a 529 plan designed to help families save for future college expenses. Maryland 529 - formerly College Savings Plans of Maryland - is an independent, non-profit State agency that provides flexible and affordable college and disabilities savings plans in accordance with sections 529 and 529A of the Internal Revenue Code. The Maryland Senator Edward J. Kasemeyer Prepaid College Trust was launched to provide families with a way to prepay for college tuition at today's rates, protecting them from future tuition increases.

Key Features of the Maryland Prepaid College Trust

Contractual Features

With contract plans, you choose how many semesters or years of college you want to save for (typically up to 4 years) and agree to pay a set amount each month as part of your contract.

Available tuition packages:

One semester to four years at a Maryland public 4-year university
One or two years at a Maryland community college
A community/university combination (2 years of each).

Benefits for attending private or out-of-state institutions

The plan will pay the actual tuition up to either the weighted average tuition in the Prepaid College Trust plan purchased or the minimum benefit, whichever is greater. If the beneficiary receives a scholarship, grant, or tuition remission, the plan will pay any remaining tuition up to the scheduled benefit.

Contract Payment Options

The Maryland Prepaid College Trust offers several contract payment options to suit different family budgets. These include:

Lump sum
Annual installments
Monthly installments
Extended monthly installments.

At any time, you may elect to make a down payment of at least 25% of the payoff amount. All initial payments following enrollment are due on the first of the month on or before 60 days after enrollment.

Financial Security

Yes, the legislature is required to consider, but not necessarily approve, an appropriation to cover any shortfall, repayable within two years.

Fees and Expenses

There is no enrollment or application fee.

Tax Benefits of the Maryland Prepaid College Trust

Like traditional 529s, prepaid 529 plans offer the same great tax benefits that make saving in a 529 an attractive option. Contributions are made with after tax dollars and grow tax-deferred, and withdrawals are tax-free, assuming clients use funds on qualified education expenses. Plus, depending on the state, there may be additional income tax deductions or credits for contributions.Maryland offers significant state tax benefits for contributions to the Prepaid College Trust:

State tax deduction: Contributions to the Maryland 529 -- Prepaid College Trust of up to $2,500 per account per year by an individual, and up to $5,000 per beneficiary per year by married taxpayers filing jointly are deductible in computing Maryland taxable income, with an unlimited carryforward of excess contributions. Account owners and contributors are eligible for the deduction. Rollover contributions are deductible if not previously deducted. Contribution deadline is December 31 postmark.
State tax treatment of qualified distributions: Qualified distributions from Maryland and non-Maryland 529 plans are exempt.
State tax treatment of rollovers: Maryland follows federal tax-free treatment.

State Tax Recapture Provisions

The principal portion of nonqualified withdrawals from this plan are included in Maryland taxable income to the extent of prior Maryland tax deductions. Rollovers are not subject to recapture.

State Definition of Qualified Expenses

The state conforms with the federal definition of qualified education expenses, which includes expenses for higher education, apprenticeship programs, interest and/or principal on qualified education loans up to a $10,000 lifetime cap, and up to $10,000 per year in tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. FOR PURPOSES OF THE PREPAID TRUST, THE DEFINITION DOES NOT INCLUDE ANY AMOUNT OF TUITION IN CONNECTION WITH ENROLLMENT OR ATTENDANCE AT AN ELEMENTARY OR SECONDARY PUBLIC, PRIVATE OR RELIGIOUS SCHOOL.

How to Enter Prepaid Tuition Contracts in Maryland

Below, you'll find answers to frequently asked questions about the Maryland section 529 deduction for college savings plans in Lacerte:

How do you enter prepaid tuition contracts under the Maryland College Investment Plan?

Go to Screen 51, Modifications.
Scroll to the Maryland Subtractions section.
Enter the amount contributed in:
- (XA) Prepaid tuition contract - prepaid college trust [O] (input sheet code 51)
- (XB) Prepaid tuition contract - college investment plan [O] (input sheet code 31).

The information will flow as follows:

Prepaid tuition contract - Maryland prepaid college trust
- Lacerte prints the amount on line XA of the subtractions form, prints the code "xa" in the box on the other subtractions line of the main form, and includes the amount in total subtractions.
- If you're the account holder or a contributor, you can deduct up to $2,500 of payments each year from your Maryland State income per account - $5,000 for two, $7,500 for three, and so on. You can deduct payments exceeding $2,500 per account in future years until the full amount of payments has been deducted.
Prepaid tuition contract - Maryland college investment plan
- Lacerte prints the amount on line XB of the subtractions form, prints the code "xb" on the other subtractions line of the main form, and includes the amount in total subtractions.
- If you're the account holder or a contributor, you may deduct up to $2,500 of contributions each year from your Maryland State income per beneficiary - $5,000 for two, $7,500 for three, and so on. But you can't deduct more than $2,500 per beneficiary per year. Contributions totaling more than $2,500 per beneficiary may be deducted for up to 10 years.

Advantages and Disadvantages

Advantages

Downside Protection: A primary advantage of prepaid 529 plans is downside protection. As previously mentioned, contributions are not invested like traditional 529 savings plans, meaning your exposure to market volatility is minimal.
Lock in Tuition Rates: Protects against future tuition increases at Maryland public colleges.
Flexibility: Funds can be used at out-of-state or private institutions, although the benefit may be limited to the weighted average tuition of the purchased plan.
Tax Benefits: Contributions may be tax-deductible on Maryland state income taxes, and earnings grow tax-free if used for qualified education expenses.

Disadvantages

Limited Investment Options: Unlike 529 savings plans, you don't have a choice of investment portfolios.
Restrictions: Primarily designed for Maryland public colleges, which may not suit everyone's needs.
Impact on Financial Aid: I heard saving for college could impact eligibility for financial aid. The short answer is yes. Savings of any kind could impact financial aid eligibility. However, the impact is minimal. A prepaid 529 account owned by the parent of a dependent student (which is how most are structured) is reported as a parent asset on the FAFSA and CSS Profile. Since parent assets are factored into financial aid formulas at lower rates than student assets (no more than 5.6% for the FAFSA and 5% on the CSS Profile), the overall impact on financial aid eligibility is small.

Other Considerations

Program match on contributions

Does the sponsoring state exclude the value of an account for state financial aid purposes?

Advantages in Qualifying for Resident Tuition

Does participation in the program provide beneficiaries with any advantages in qualifying for resident tuition status at state institutions?

Rewards Programs

Is there a rewards program or outside scholarship program that works with this program?Yes, the Upromise Rewards program can be linked to any 529 college savings plan.

Other Prepaid 529 Plans

Florida Prepaid: Florida Prepaid is a contract plan. Families can choose from multiple plans and payment options starting at $45 per month, available for 2 or 4-year state colleges. Beneficiaries must be in 11th grade or younger at the time of enrollment and be Florida residents. Payment amounts are based on the student’s age and selected plan. Florida Prepaid offers a housing option, and unused contract benefits may be used for graduate level tuition.
The U.Plan: The U.Plan is available for roughly 70 public and private colleges in Massachusetts. Contributions buy tuition certificates that purchase a portion of tuition and fees at a network of colleges and universities. Upon redemption, tuition certificates will cover the same percentage of tuition and fees purchased. Families can redeem certificates after 5 years, and the minimum contribution is $300 each year to purchase a certificate. The out- of-network refund is your initial investment back plus interest compounded at the annual consumer price index.
The Michigan Education Trust (or MET) is a contract plan for Michigan residents. MET offers two university plans - full benefits and limited benefits - and one community college plan with multiple payment options, including lump sum, monthly purchase, and pay as you go.
The Mississippi Prepaid Affordable College Tuition Plan (or MPACT) is a contract plan available to Mississippi residents. The plan offers 8 different savings options that range from 4-year university to 1-semester community college, starting at $16 per month.
Private College 529 Plan is a prepaid tuition plan that functions like a unit plan. Account owners lock in a percentage of tuition and fees - in the form of tuition certificates - for nearly 300 private colleges and universities nationwide. The amount of tuition purchased is based on the current rate of tuition at each participating school. The percentage of a year purchased will vary by school, based on the tuition rates for the academic year in which your certificates are purchased. The redeemable value is based on how long you have held tuition certificates and the increase in tuition and mandatory fees. The out-of-network value is based on the amount contributed, adjusted for the net performance of the program trust, subject to a maximum increase of 2% per year and a maximum loss of 2% per year, compounded annually.
The Nevada Prepaid Tuition Program is a contract plan for Nevada residents. The plan allows residents to purchase a contract for a specific number of either college or university level higher education credit hours at a locked-in contract price, and pay for that contract over an extended period. The beneficiary must be in 9th grade or below and 18 years old or younger at the time the contract is purchased. Contract benefits may be used at any eligible educational institution nationwide.
The PA 529 Guaranteed Savings Plan (or GSP) is a unit plan, and contributions purchase tuition units. Their value increases over time to track average tuition increases in one of several school categories selected by the account owner. Families can take a refund one year after contributions are credited to their account.
The Texas Tuition Promise Fund is a unit plan. Account owners select one of three unit types: Type I: 100 units represent 1 academic year at the most expensive Texas public college or university; Type II: 100 units = 1 academic year at the weighted average cost of a 4-year public college or university; Type III: 100 units = 1 academic year at the weighted average cost of a 2-year public college or university. Tuition unit sale prices are based on the current academic year costs at eligible Texas public colleges and universities. Families must purchase at least 1 unit to establish an account plus a $25 application fee.
Washington Guaranteed Education Tuition (or GET) is a unit plan. 100 GET units equal one year of resident, undergraduate tuition and state-mandated fees at Washington’s most expensive public university. You can add units all at once, over time, or through monthly payments. Units must be held for two calendar years before they are eligible for use.

Of the ten plans, eight have residency requirements, meaning the account owner or student must be a resident of the state offering the prepaid plan. Exceptions are the U.

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