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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’ll 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 state-run 529 college savings plans, but there is another option that could prove even more valuable. The Private College 529 Plan allows families to lock in tomorrow’s tuition at today’s rates at more than 270 private schools nationwide. Let’s dig a bit deeper to see whether it could fit into your own college savings strategy.
The Private College 529 Plan was created by a consortium of private colleges. It allows families to pay for college in advance by purchasing “tuition certificates” 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’s worth of tuition at School A might be good for only, say, 0.7 semesters at School B. However, the values don’t change over time. So if you buy a certificate that can pay for one semester at School X, it will always 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 — the plan’s 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.
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’s 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’s eligibility for financial aid.
The biggest risk with the Private College 529 Plan comes if the money is not used at a participating school. The funds can be transferred to a state-sponsored 529 plan, but the tuition certificates’ 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 subject to taxes and a 10% penalty.
These factors make the plan best suited for families focused on private schools — 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 tied to tuition increases.
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 planning strategy 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’s education. This can have bad consequences for their retirement 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’t have to sacrifice their retirement in the process.
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