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Financial
Jun 6, 2018

Saving for College with Zero Market Risk: The Private 529 Plan

Sponsored Content provided by Brett Tushingham - CFP®, CCFS®, Managing Member & CCO, Tushingham Wealth Strategies

Outstanding student loan debt is now over $1.5 trillion. 

This is second only to mortgages when it comes to household debt. Nearly one quarter of these borrowers are already in default!  This fact alone should encourage you to start saving now for college.

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 nearly 300 private schools nationwide.

Let’s dig a bit deeper to see whether it could fit into your own college planning strategy.


The Facts

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 close to 300 undergraduate private schools. The certificates can be used towards undergraduate tuition and mandatory fees.
 
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.

There are no income limitations, but the plan does require at least 36 months between buying certificates and using them.


The Benefits

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 the investment risk and have agreed to honor the certificates regardless of the school’s future participation in the program or future tuition increases.

For example, tuition at College A is now $35,000 a year and you contribute $35,000 into an account with your 8-year-old child as beneficiary. If tuition rises an average of four percent a year, in 10 years, College A's tuition would be $51,809. By prepaying, you save $16,809 on that year of tuition. That $16,809 savings is tax-free.

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-percent paid for by the member colleges and universities.

Lastly, the accounts are considered parental assets and therefore will have minimal impact when calculating a child’s eligibility for financial aid.


The Drawbacks

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 two percent per year and a maximum loss of two percent 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 percent 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 risk-averse, looking for a return in the form of investment appreciation tied to tuition increases.


The Verdict

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. 

At Tushingham Wealth Strategies, our goal is to help you proactively oversee all of your financial affairs by serving as your “Personal CFO” and fiduciary, so that you may live your ideal life worry free. As part of our "Personal CFO" service we help families develop "late stage" college planning strategies so that they can save money on college, protect their retirement assets and help their children graduate with minimal student loans. This is why our “Personal CFO” services will help you integrate college and retirement planning into one strategy.

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