Are you concerned that your college savings fund may not keep up with the rising costs of college? Good investment options are available through the 529 College Savings Plans. However, does the private college tuition-guarantee plan present a better option for your child?
According to Educationdata.org, college costs have tripled over the past 20 years (an average annual increase of 6.8%). Currently, the average tuition rate for an in-state public university is $9,580 per year and $27,437 for out-of-state students. The average tuition at a private university is $37,000. Inflate today’s cost at 6.8% per year over the next 15 years and the cost increases to $25,700, $73,600, and $99,200 per year! That’s tuition alone – room, board, and other incidentals are an added expense.
You’ve Got Options
- 529 College Savings Plans. These plans are deservingly popular. They are designed to be a tax-efficient savings vehicle and many offer quality investment options with low expenses. Additionally, these plans are flexible and cover qualified education costs, including tuition, room, board, books, and supplies.
- Private College 529 Plan. Another option is the Private College 529 Plan. If you anticipate your child will attend a private college or university, this type of plan allows you to prepay for their future education at today’s tuition rates.
- State-Sponsored 529 Plan. A third option is a state-sponsored tuition prepayment plan. However, only nine of the existing plans are accepting new applications. Like the Private College 529 Plan, a state-sponsored plan allows you to lock in the current cost of tuition at the state’s public institutions that are participating in the plan.
About the Private College 529 Plan
You are probably familiar with the 529 College Savings Plan, so let’s compare its features with the Private College 529 Plan.
The Private College 529 Plan has approximately 300 private colleges and universities from around the country that participate. Unlike the state-sponsored prepaid tuition plans that include only public institutions within the state, the Private College 529 Plan allows your future college student to select the school of their choice from among any of the schools that participate regardless of geographic location. You can access a list of the plan’s participating schools at: https://privatecollege529.com/participating-schools/.
How It Works
An adult can establish an account with a US Social Security number or individual Taxpayer Identification Number to benefit a child, grandchild, or even themselves. An account can be established with or without a designated beneficiary and there is no fee to open or maintain an account.
Tuition certificates are purchased within the account based on today’s tuition cost at participating schools. They are later redeemed to pay for the beneficiary’s tuition and mandatory fees at one of the participating colleges. However, the certificates cannot be used to pay for room, board, or other required supplies.
When the plan’s beneficiary enrolls in a participating college, the certificate’s value is based on the original contribution in relation to the cost of a year’s tuition at the time of purchase. For example, a $15,000 certificate might pay for 25% of tuition at one university versus 33% at another. Also, important to note that certificates can only be redeemed for undergraduate study.
You can buy multiple certificates over the years. Each certificate will lock in the cost of tuition at the time of purchase. Each Plan statement you receive will indicate how much tuition you own based on the participating schools selected on your Plan application.
Unused Certificate Credits
If your child receives a scholarship, you can withdraw an equal amount from the account without penalty. (The earnings are subject to federal and state income tax.)
If your child does not attend one of the participating universities or does not use all of the certificate credits, you can:
- Change the beneficiary on the account,
- Roll the funds over to a state-sponsored 529 college savings plan, or
- Withdraw the funds (any investment earnings are subject to income tax and an additional 10% penalty tax).
Your contributions to the plan are held in Trust and invested by the Plan Administrator. Investment earnings are capped at 2% per year and losses at -2% per year.
Consider the pros and cons before investing in a Private College 529 Plan. While the Plan allows you to buy certificates to lock in current tuition rates for participating colleges, they don’t allow you to invest your savings in marketable securities. The Private 529 also limits qualified expenses to tuition and mandatory fees for undergraduate studies. Should you feel strongly that your child will attend a private college and are eager to establish a Private College 529, you might consider opening a traditional 529 savings plan as well to help pay for housing, meals, and other educational costs.
Kathy Hower, CFP, is a Senior Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Kathy at email@example.com.