The 529 Prepaid Tuition Plan enables a parent to lock in future tuition rates at participating colleges and universities at current prices. As such, the 529 Prepaid Tuition Plan acts as a derivative investment that increases in value as the relevant tuition rate increases. For example, if you purchase one year's worth of tuition credits today, those credits will always be worth one year's tuition even after several years of tuition rate increased. Most prepaid tuition plans are sponsored by state governments, although some are sponsored by private colleges and universities.

Although guaranteed by the state and a risk free way to pay for college, the 529 prepaid tuition plan has significant disadvantages. First, the 529 prepaid tuition plan has very limited growth potential and typically only offers 4 to 5 percent interest per year. Second, the contributions to a 529 prepaid tuition plan are not tax-deductible, although they do enjoy tax-free growth like the 529 Savings Plan. Third, the money placed into a 529 prepaid tuition plan cannot be used for any accredited public or private college, trade, or graduate school education nationwide, only participating schools.