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Published: Feb 01, 2016 2 min read
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Gunter Kirsch—Alamy

Pay tomorrow's tuition at today's prices? That sounds like a great deal—and it might be, but only under certain circumstances. Here's what you need to understand about prepaid 529 plans.

HOW THEY WORK: In about a dozen states you can essentially buy educational credits now, at current prices or with an added premium, for future use at in-state institutions. There's also one plan, at privatecollege529.com, that lets you prepay for about 300 private schools.

THE CAVEATS: You usually can invest only in your own state, says Joe Hurley, founder of Savingforcollege.com, which keeps a database of the plans' financial details. And while there are bailout options if your child wants to study elsewhere, you may get back only your own investment plus inflation.

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BEST FOR: Parents who are pretty confident that their kids will end up at State U should do fine. Florida and Maryland residents also get generous cashouts if your kid heads elsewhere, letting you walk away with about what you would have spent on in-state tuition.

WHEN TO SKIP: For most out-of-staters, of course, prepaid plans are a nonstarter. And if you think your child is going to be aiming for Yale rather than the local public university, steer clear. A traditional 529 is a safer investment bet.