A Different Twist on Education Planning
At THOR, we continually strive to find the best financial solutions for our clients. We recently reviewed the “Private College 529 Plan,” which has an interesting twist to saving for college expenses. Most of our clients are aware of traditional 529 plans. The Private College 529 Plan is different from a traditional 529 plan in a number of ways. Before discussing the Private 529 Plan though, let’s take a look at just how much tuition prices have increased over the last few decades. Everyone knows that tuition has increased significantly over the years and most professionals in the education field would argue these increases will continue at approximately a 6-7% clip each year. These drastic increases in tuition can really hurt a family’s chances of retiring financially secure unless they plan appropriately for their children’s college educations. To put in perspective how fast tuition has increased, we compared it to health care costs. Since 1980, health care costs have increased 507%, while the overall CPI (consumer price index) has risen 203%. This might seem astronomical until you compare it to tuition – tuition has increased 878% since 1980!
The Private 529 Plan is considered a prepaid tuition plan. The sponsor of the plan is Tuition Plan Consortium LLC, a non-profit membership organization comprised of the participating colleges and universities. There are 270+ elite colleges and universities such as Notre Dame, Duke, UCLA and Princeton that participate in this program. Here is how it works. You deposit a set dollar amount into the program and “lock-in” the tuition rates for any one of those 270+ schools for the following 30 years. For example, let’s say you decide this plan is right for your child or grandchild and you invest $80,000 on June 28, 2014. You anticipate that your child will go to the University of Dayton (“UD”), which has a price tag of $37,230/year for the 2014-2015 school year. The $80,000 purchases 2.15 years of paid tuition for future use ($80,000/$37230 = 2.15) during the next 30 years. No matter what happens to the price of UD’s tuition, you have 2.15 years of education paid for already. The same formula applies to any other college.
No one situation is the same and there are different college planning scenarios so we will discuss a few rules regarding this program.
- The “tuition certificates” that you purchase with the $80,000 can only be used for tuition and mandatory fees – nothing else.
- The beneficiary does not need to commit to any school until the tuition certificates are redeemed in order to make payment. There is no guarantee of acceptance to any of the schools in the program.
- Schools can exit the plan at any time but are required to honor any tuition certificates purchased prior to its exit.
- There are no fees to the program.
- Requests for full or partial refunds from the tuition certificates are possible. The certificates must have been open for 12 calendar months or more to request a refund. The refund amount will be the amount of your original purchase price plus or minus the net performance of the program trust, subject to a maximum increase of 2% and maximum loss of 2% per annum.
- Any gain on a withdrawal not used for college tuition will be subject to the same 10% penalty that traditional 529 plans are subject to.
- The tuition certificate must be purchased at least 36 months before using it to pay for tuition.
- You can change the beneficiary of tuition certificates as long as it’s a “family member” as defined by Section 529 – father, mother, brother, sister, children, grandchildren, cousin, or spouse of any of the those individuals.
As with everything in life, there are some drawbacks associated with the plan:
- You cannot choose specific certificates to be redeemed if you own more than one. They must be redeemed on a pro-rata basis.
- No refund is available after redemption.
- The plan can be terminated at any time. If so, the guarantee of 30 years is adjusted to 20 years.
- Previous participating institutions are not required to honor certificates that were purchased after the school withdrew from the program.
If you have any questions about saving for college or would like more information about the Private 529 Plan, please contact any of us at THOR. We would be more than happy to help you.
Your THOR team