Correct. If you are offered an appointment to Prep School, the cost is covered. There is some info on this page with links if you have not seen it: https://www.uscga.edu/cgas/Here's a dumb question.
If you get selected to go to prep school is it 100% paid for by the federal government?
Also, if you don't get into the academy next year I assume the credits transfer to another school so you wouldn't repeat freshman year??
According to USCGA stats, 80% of those that attend prep school are offered an appointment for the next year. There are always a few people who attend, and then decide that the military is not right for them. You are not obligated to reapply the next year, but most everyone does. From my understanding, if you maintain the required GPA and fulfill all requirements, you are pretty much guaranteed a spot in the next year's class.
If you choose not to reapply or cannot fulfill the requirements, then yes, you can transfer any credits to another school (with the same understanding that there always is when trying to transfer credits that not every school will accept all credits).