BY TERRY SAVAGE
Longtime readers of this column know that I strongly encourage contributing to a 529 college savings plan that offers investment options as the most efficient, tax-free way to save for your child’s future college expenses.
I have long advised against signing up for the prepaid tuition version of the 529 plan because what you are really purchasing is a promise from a state that it will fund tomorrow’s tuition at today’s rates. That promise could be iffy. Consider the case of Illinois, which has a “junk” credit rating and hasn’t had a budget in two years. Colleges in Illinois are no longer as attractive as they once were, as they cut faculty and costs in the wake of state spending cutbacks.
While some states are stronger, and more likely to keep their promises, who wants to be at the mercy of state legislators to keep their promises or to provide a tuition-worthy educational system?
What if you could eliminate the middleman — the state promise — and go directly to the best institutions to get a guaranteed prepayment of tuition at any of them, knowing that no matter how high tuition costs rise, you have purchased future tuition at today’s prices? They are called “tuition certificates” and the guarantee comes directly from the schools.
That’s the premise of the Private College 529 prepaid tuition plan. Nearly 300 colleges have joined together to participate in this program, and the names include some of the most prestigious schools in the country, such as Stanford, Notre Dame, Princeton, Duke, Amherst, and Wellesley.
Details are available at PrivateCollege529.com or by calling 888-718-7878. But here are the basics of how the program works:
–How the tuition is priced: Of course, tuition varies widely at these schools. So you must invest more money today to buy a year at Princeton than you would to prepay a year’s tuition at, say, Bradley University in Illinois. There’s a strict formula to determine how much tuition your dollar buys at each school. Every member institution reports their rates to the Private College 529 plan annually, so an index is created. When deposits come in, they are indexed against tuition rates in that year.
–Where the tuition can be used: The tuition certificates can be used at any participating college. Perhaps the student will attend a lower-cost school close to home for the first two years and then transfer to a more prestigious school for the last two years. That will make the certificates stretch farther to pay for college. You can log in to your account online to see how much tuition your certificates will purchase at any of the schools.
–Who can use the certificates: Money can be transferred between children in the same family. The impact on financial aid is minimal, since the plan is considered a parental asset.
–What if the money is not used: Perhaps your child gets a scholarship, or doesn’t attend college, or attends a school that is not part of the program. The money can be withdrawn. But the withdrawal value can range only between plus or minus 2 percent annual return on the money you have deposited. As with other 529 plans, any gains withdrawn for purposes other than tuition are taxable as ordinary income.
–What expenses the certificates cover: The certificates can only be used for tuition and mandatory fees at participating colleges. Therefore, parents should also be saving, perhaps in a traditional 529 investment plan, to cover costs of room and board, books and other college expenses.
This is truly a worthy alternative to the state-run prepaid tuition plans because it’s more likely that a top-rated private college will be worthy of your tuition than that some states will continue to make good on their promises.