Let’s say you’re among the 76% of parents recently surveyed by Gallup/Sallie Mae who don’t plan to tap your retirement savings to pay for college. The rising cost of tuition is still a big concern, especially if you’re considering a private institution.
In that case, you might want to take a fresh look at the recently renamed Private College 529 Plan, which lets parents pre-pay the tuition at more than 270 private colleges, from MIT and Mount Holyoke on the east coast to Stanford and Pomona on the west. The pre-payment essentially freezes the cost of a child’s future education at current rates.
Formerly known as the Independent 529 Plan, the program donned its new name in August, when it also switched investment managers, from TIAA-CREF to a subsidiary of Oppenheimer Funds.
Prepaid tuition plans aren’t new, and neither is this one. But it is the only one geared toward private colleges. And the appeal is obvious: If you pay four years’ worth of college costs today — let’s say $104,000, based on the current average figure for private college tuition and fees — those payments will cover tuition down the road, even if tuition increases to, say, $150,000 by the time your child gets around to matriculating. You’ve effectively saved about $50,000. And it’s not fearmongering to forecast that college prices will continue to rise: The college tuition inflation rate is roughly double that of the general inflation rate.
The downside is that you’ve lost the use of that $104,000 between the time you’ve invested it and when Junior heads off to college. Also, most parents will buy tuition credits over time, and those are locked in at each current year’s rate and aggregated at the end. Unless you or the grandparents contribute a bundle, your 529 contributions alone may not cover the whole bill.
Like most 529s, the money you put into the Private College 529 Plan is withdrawn tax-free. You can also roll your money over to a public 529 plan or a traditional, investment-based one.
The trouble arrives if you put the money in and your child decides not to go to college, says Mark Kantrowitz, the publisher of FinAid.org, an excellent resource for college financial aid planning. “The refunds of both state plans and the private 529 plan tends to be fairly limited,” he says, “in that you’re not going to get a great return on your investment.”
That’s because prepaid plans aren’t investment-based, really, unlike the most common 529 plans, where parents choose investments as they would in an IRA or 401(k), with all the attendant risks and potential rewards of being in the market.
If you want your money back, you can use it in one of three ways:
- For non-education purposes (you’d incur a 10% penalty, as with other 529 plans)
- As a rollover to a traditional 529 plan
- As a straight refund for educational purposes.
In the last two cases, you wouldn’t be charged a penalty, and you’d get your money back plus or minus 2% (depending on market conditions), according to Nancy Farmer, CEO of the Tuition Plan Consortium, a group of private colleges that run the plan.
Farmer says that research shows half of parents are so leery of putting their college funds into any sort of investment that they leave the money in low-interest CDs or savings accounts. Buying tuition credits through a pre-paid plan at least guarantees that some part of your child’s tuition is already paid for — and likely for much less than it would cost the day she enrolls.