Generally, when we discuss college savings plans, we focus on state-sponsored plans and most often Georgia’s Path2College plan, as it is a well-run plan and offers a state tax deduction for contributions by Georgia residents. However, based on a recent client’s question, the focus of this week’s case study is Private College 529 Plan. The plans allow you to pay for tuition at nearly 300 private colleges and universities nationwide.
The plan is not an investment like a state-sponsored plan, rather it allows you to purchase tuition certificates at today’s prices. These certificates are guaranteed by the participating colleges so they will never lose value regardless of stock market performance or an increase in tuition costs. However, the value of a tuition certificate varies depending on the school. A $10,000 certificate may be worth half a semester at school A but only worth a quarter of a semester at school B. This makes it a bit trickier to determine if you have saved enough.
When you set up the Private College 529 Plan account, you can select up to five sample schools. Your account balance is reported in fractions of years of tuition you own at each school. This does not commit you to the schools, and you can change your sample schools at any time.
Tuition certificates through the Private College 529 Plan are valid for up to 30 years from the purchase date. You also have to hold the certificates for 36 months before you can redeem them at a participating school. The schools absorb all the fees for the plan, so every dollar you contribute goes toward tuition. The increase in value and distributions are then tax free when redeemed for tuition at a participating school.
If you have plans for your child to attend Emory, Princeton, Notre Dame, or Vanderbilt, to name a few, locking in today’s tuition prices could easily save you money. However, prepaid tuition through the Private College 529 Plan does not guarantee admittance to these schools. Furthermore, these schools are not the easiest to be accepted to. While you may be able to reduce the investment risk and inflation risk by purchasing tuition today, you do take on the risk that your child may change career plans and join the military or may choose to go to a public university.
If your child doesn’t attend a participating private college or university, you can change the beneficiary to another eligible family member or roll your assets into a state-sponsored 529 Plan. Rollovers or refunds of tuition certificates are paid out of the underlying program trust. The value will be based on the amount of your contributions, adjusted for the net performance of the trust, subject to a maximum 2% increase per year and a maximum loss of 2% per year, compounded annually. Like state-sponsored plans, if refunds or rollovers are not spent on qualified higher education costs, you will likely owe taxes on the earnings portion and a 10% penalty.
One benefit to the plan is that there is no income limit for families who want to contribute. The account limit is set annually, currently $265,450 which is five years at the most expensive participating school. Like state-sponsored plans, you can contribute up to $14,000 a year without incurring gift tax consequences. Furthermore, you can “super fund” the Private College 529 Plan with $70,000 ($140,000 if you are married filing jointly), prorating the contributions over five years.
Unlike a state-sponsored plan, the Private College 529 Plan is for tuition and required fees only. Because your student or you will still need to pay for room and board, books, computer or supplies, you may consider funding both the Private College 529 Plan and a state-sponsored plan to cover the additional costs to college.
In general, 529 Plans are not a one-size-fits-all solution regardless if they are pre-paid tuition or a savings program; however, they do provide a unique savings opportunity for those saving specifically for higher education costs. If you have questions regarding saving for college costs, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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