Prepaid 529s: Another Option?
By Harold Simansky
Educational Investment Advisor
529 Prepaid Plans offer a different option in saving for college.
Not to be confused with 529 Savings Plans, the prepaids allow you
to lock in future tuition costs at today's prices. You make the full
payment now or pay over time. Then, when your child is ready for
college, no matter how high tuition has risen in the meantime - the
program takes care of it at any participating school.
While such pre-paid plans are ubiquitous among public colleges
and universities, until recently, very few private schools offered
a prepaid plan. But this changed with the emergence of the Independent 529 Plan
(www.independent529plan.org),
which is specifically for private colleges and universities. As with the
state-sponsored 529 Prepaid Plans, participants can purchase tuition certificates
at current prices – even with a small discount – and then
use these certificates at any private college taking part in the program.
Currently about 250 private colleges and universities participate in
the Independent 529 Plan.
This is considered a tax-advantaged plan because you have made an
investment worth a certain amount, have seen that investment
increase in value; and yet you haven't had to pay any taxes
on this increase in value.
A Look at the Disadvantages
Prepaid plans offer some advantages, including low-risk, guaranteed
returns on your investment. But they also come with a catalog of
disadvantages, chief among them is a lack of flexibility.
Consider this scenario. You've invested in a prepaid program, but your child
decides to attend a college that isn't in the private school consortium - or
maybe she decides not to go to college at all. You want to get your money
out of the plan, and you might be able to do that - but probably not without
paying various fees and penalties that significantly reduce any earnings you
would have had on this money.
While some plans will pay some interest on your original contributions, a number of
them will not - and invariably the rate of interest that is paid is extremely low.
For example, in Massachusetts, you get your contributions back along with interest based on the
rate of inflation - which is practically nothing and generally worse than even a
conservative investment.
In the past, another serious disadvantage for 529 Prepaid Plans is how they
were treated from a financial aid perspective. Happily this is no longer the
case. A recent change in the tax law now has 529 Prepaid Plans considered the
asset of the parent rather than the student. In this way, both 529 Prepaid
Plans and the more popular 529 Savings Plans have the exact same effect on
financial aid i.e., a minimal effect.
At best, a prepaid plan is but a partial solution because you can only use the money
for tuition. Given that about 25 percent of a college bill is for room and board, it's
likely you will need a second savings plan to cover this piece of the cost. This is
why a 529 Savings Plan or a Coverdell Education Savings Account might be a better
choice. Both of these programs cover not only tuition but also room and board.
For the right family, a prepaid plan may make sense. If you are a conservative investor
with a good sense of where, and whether, your child will attend college, a prepaid 529
merits some investigation. For most families, though, they are the least beneficial of
the savings programs we have discussed. Given their inflexibility and low rate of return,
it's best to shop around for a more advantageous way to save for college.
Article #7 -
Grandparents Can Help!
About the Author
Harold Simansky is the founder of Educational Investments, LLC, (www.educationalinvestments.com)
a Registered Investment Advisory firm focused on helping families save for
education. His book, College Costs How Much?! The Workbook to Help You Save for
School, which explains the financial aid process, is available at
www.CollegeCostsHowMuch.com. You can send
him an e-mail at Harold@edinv.com.
|