The private college 529 plan might save you thousands
The cost of attending some private colleges and universities now exceeds $65,000. Outside of funding your retirement and buying a house, a college education will most likely be the biggest financial investment you鈥檒l make. Establishing a sound savings strategy early on will give you more options when it comes time to pay the bill.
Most families are familiar with听, but there is another option that could prove even more valuable. The Private College 529 Plan allows families to lock in tomorrow鈥檚 tuition at today鈥檚 rates at more than 270 private schools nationwide. Let鈥檚 dig a bit deeper to see whether it could fit into your own college savings strategy.
The basics听
The Private College 529 Plan was created by a consortium of private colleges. It allows families to pay for college in advance by purchasing 鈥渢uition certificates鈥� that can be redeemed at more than 270 undergraduate private schools.
Since different schools charge different rates, certificate redemption values vary from one school to the next. A certificate good for one semester鈥檚 worth of听听at School A might be good for only, say, 0.7 semesters at School B. However, the values don鈥檛 change over time. So if you buy a certificate that can pay for one semester at School X, it will听always听be good for one semester at that school.
Families do not have to commit to a particular school at enrollment and can change the beneficiary on a plan to a qualified family member at any time. Parents can also roll the money into a state-sponsored 529 plan; however, the rollover value of a tuition certificate depends on the performance of the Program Trust Fund 鈥� the plan鈥檚 underlying investments.
You can pay any amount, up to the cost of five years of tuition at the most expensive participating school (the contribution limit is $256,000 for 2015-16). Tuition certificates can be redeemed to pay tuition and mandatory fees at a school where the plan beneficiary is admitted and enrolls. There are no income limitations, but the plan does require at least 36 months between buying certificates and using them.
The benefits
Tuition certificates guarantee tuition at current rates for up to 30 years after purchase. With tuition increasing at twice the pace of inflation, on average, the future benefit could be enormous. Participating schools assume all of the investment risk and have agreed to honor the certificates regardless of the school鈥檚 future participation in the program or future tuition increases.
As with other 529 plans, parents remain in control of the account even though the contributions are not considered part of their estate, and the benefits are tax-free when used for qualified education expenses. The Private College 529 Plan does not charge any fees, and all costs are 100% paid for by the member colleges and universities.
Last, the accounts are considered parental assets and therefore will have minimal impact when calculating a child鈥檚 eligibility for听.
The drawbacks
The biggest risk with the Private College 529 Plan comes if the money is听not听used at a participating school.听The funds can be transferred to a state-sponsored 529 plan, but the tuition certificates鈥� value will be adjusted based on the net performance of the trust fund, subject to a maximum increase of 2% per year, and a maximum loss of 2% per year.
Additionally, as with regular 529 savings plans, if the money is not used for qualified education expenses, any earnings are听subject to taxes and a 10% penalty.
These factors make the plan best suited for families听focused on听private schools 鈥� perhaps for parents who want their children to attend their alma mater or for someone looking for a return in the form of investment appreciation听tied to tuition increases.
The verdict
The Private College 529 Plan closely resembles a company pension: You contribute a stated amount for a guaranteed future benefit. The peace of mind of not having to deal with inflation and market risk would probably appeal to most families. Add on the lack of fees, the tax benefits and the flexibility and you have an enticing vehicle for funding private college tuition.
One听听could be to use the Private College 529 Plan to cover tuition and a regular 529 plan to pay remaining costs (such as room and board) and to obtain and state tax deduction for 529 contributions.
Some parents are tempted to use their own assets, current cash flow or home equity loans to help pay for their child鈥檚 education. This can have bad consequences for their听and future goals.
To protect your assets and income for your retirement, work with a financial advisor who takes a consultative approach to college planning, develop a savings strategy early on and be sure to integrate that savings strategy into your overall college plan. We all want the best for our children, but parents shouldn鈥檛 have to sacrifice their retirement in the process.
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