The Private College 529 Plan
If you're a parent or grandparent looking at your state-sponsored 529 prepaid tuition plan as a vehicle to stash your college savings, you may be interested to know there's another type of prepaid tuition plan that is sponsored by colleges. To date, only one such national prepaid plan run by a consortium of private colleges exists—the Private College 529 Plan.
How does it work?
The Private College 529 Plan operates like a typical prepaid tuition plan by allowing you to prepay tuition today that your child or grandchild can use in the future at any member college. But instead of the state carrying the risk that contributions won't meet future tuition increases, the colleges carry that risk. Specifically, the member colleges guarantee that the amount of tuition you purchase today will satisfy the proportionate amount at the time your child or grandchild enrolls.
For example, let's say you purchase tuition certificates today that are worth two years of tuition at College ABC. Your child or grandchild would then be covered for two years of tuition in the future at College ABC, no matter how much tuition rises or what happens in the markets.
Member colleges and tuition certificates
Currently, there are over 270 participating member colleges in the Private College 529 Plan (for a complete list, call 1-888-718-7878 or visit https://www.privatecollege529.com/). When you open an account, you purchase a certificate in the child's name. You don't choose a college ahead of time. The certificate you purchase will represent a different value at each member college because each college has a different tuition rate. For example, a $20,000 certificate purchased today may be worth one year of tuition at College ABC but only half a year of tuition at College XYZ.
Each year, new tuition rates are set for each member college. As an added bonus for plan participants, member colleges must discount their tuition between 0.5 percent and 2 percent from their official "sticker price" rates. Any certificate you purchase is valued at the plan's current year's tuition rates. Each certificate must be held for at least three years before it can be used. If a member college ever withdraws from the plan, it is obligated to honor all certificates that were purchased prior to its withdrawal.
One last point: keep in mind that opening an account in the plan doesn't guarantee that your child or grandchild will be accepted at a member college—the application process is separate and unrelated.
The Private College 529 Plan has no joining fees, maintenance fees, or annual fees—all administration and management costs are paid by the member colleges. And like state-sponsored prepaid tuition plans, the increase in value between the amount you prepay and the amount of tuition for which the certificate is redeemed is free from federal income tax. Anyone can open an account, and you can contribute as little as $25 per month or larger lump sums up to $190,000—the 2009/2010 contribution limit.
What if my child or grandchild doesn't attend a member college?
If the child doesn't attend a member college, you can: (1) get a refund, subject to a maximum return/loss of +/- 2 percent per year (the withdrawal amount will be free from federal income tax if it's used for the child's qualified education expenses); (2) change the beneficiary to a different family member without penalty; or (3) roll over the account tax free into a state-sponsored 529 prepaid tuition plan or college savings plan.
Note: Before enrolling, read all plan documents carefully. Also, before investing, consider whether your state offers a 529 plan with favorable state tax benefits. For additional help, contact your financial professional.