Private College 529 Plan is a unique option for locking in tuition costs

by Grace

The Private College 529 Plan is “a relatively little-known program that lets participants prepay tuition at private colleges and universities, at today’s rates”.  This plan is unusual in that prepaid 529 plans are typically designed for enrollment in public colleges.

How it works

… Families contribute to a trust and get a certificate representing a share of tuition at current rates, a proportion that remains constant even as tuition rises. So, for instance, if you were to pay in $10,000, and the tuition at a given college were $40,000, the certificate you bought would be worth a quarter of one year’s tuition at that college. If, in 10 years, the tuition is $60,000, your certificate would be worth a fourth of that amount, or $15,000. Money must be in the plan for at least three years before it can be used. The plan covers tuition and mandatory fees, but not room and board and other expenses, like books.

The private plan includes more than 270 participating colleges and universities, but what happens if your child doesn’t want to attend one on their list?

If your child chooses a college that is not in the plan, you can change the beneficiary of the account, so another family member or relative can use it. Or you can request a refund. But you will earn only 2 percent maximum on your savings in the plan, and you could be subject to a loss of as much as 2 percent, depending on the performance of the trust’s investments. (While the value of the tuition certificates are guaranteed, plan documents caution that refunds aren’t assured, if the trust lacks funds to pay them. But Ms. Farmer says it’s “hard to imagine a scenario” in which that would happen. Refunds have averaged about 1 percent of plan assets for the last five years.)

Both the private and state prepaid 529 plans guarantee parents a locked-in tuition cost that can mean substantial savings, but there are some risks involved.

Because the emotional draw of the plan is strong, it is important that families carefully consider possible risks. For instance, to benefit from the plan, students must be accepted at a member college, and they do not get extra points in the admissions office for participating. The savings are greatest when families join early, but making such a commitment for a baby is a gamble. A student may later feel financial pressure to choose a college that participates in the plan.

What if college costs stabilize?  These prepaid plans may not turn out to be such a good value if college costs stagnate or even drop after their meteoric increases over the last few decades.

Related:  Average 529 savings reach all-time high

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