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 If you've ever felt helpless against the rising cost of college tuition, you're not alone. And fortunately, there is an answer to this problem in the form of 529 plans that offer those saving for college a prepaid tuition option. That's great news for investors looking to lock in the cost of college tuition and provide their children with a large choice of private colleges and universities.
Rising Cost of College Tuition
According to College Board the average cost of a four year private college or university costs a little over $24,000 per school year in 2007 / 2008. That figure includes the cost of tuition, and fees and it's up 5.4% from last year's (2006 / 2007) figures.
Many parents are faced with the decision to take out a second mortgage, postpone retirement for a couple of years or even using their retirement money to pay for college. For these and many other investors, the ability to lock in the cost of college used to be a dream, but then came along prepaid college tuition plans.
Independent 529 Plans
An independent 529 plan allows participants to buy prepaid tuition certificates that lock in tuition costs at today's prices. In fact, independent 529 plans even allow for discounts of up to 3% at more than 250 private colleges and universities across the United States.
How Prepaying Tuition Works
Each time you contribute to the independent 529 plan, the money goes towards tuition certificates. The cost of each certificate is based on current college costs and they can be redeemed at a future date to pay for tuition in the form of college credits.
The popularity of prepaying tuition is starting to spread not just among investors, but also among well known college and universities. Stanford, Princeton, MIT and many other prestigious universities and colleges now participate in such plans.
Returns on Prepaid Tuition Plans
When you participate in an independent 529 plan, the return you get on your investment is not tied to the performance of a fund as it would with a state run plan. In fact, the best feature of these independent plans is that your return on investment is equal to the rise in the cost of college. So your overall return is exactly equal to college cost "inflation."
Prepaid Tuition Example
Here is an example of how prepaid tuition works. To make things simpler, let's assume the investor has $35,000 they want to place in the plan and that is exactly equal to the cost of MIT for one academic year. In this example, the investor's child is 5 years old and will be attending college in the year 2020.
If the cost of college tuition continues to rise at 5.4% for the next fourteen years, the cost of a year at MIT will be over $73,000 in 2022. But the certificate purchased for $35,000 fourteen years earlier entitles the child to one year of tuition at that school.
Using Prepaid Tuition
But let's say that your child isn't accepted to the prestigious university you'd hoped for - now what? Well, these independent 529 prepaid tuition plans provide you with several options. For example, you can:
- Transfer the plan to another child
- Get a refund from the plan (which may or many not be greater than the amount contributed)
- Apply to any one of over 250 participating colleges across the U.S.
The bottom line here is that these prepaid plans are flexible and already have rules in place to accommodate real world problems.
Prepaid College Funding Strategies
Perhaps the most important strategy to keep in mind is to put money aside each year and the earlier you can do this the better. That's because the sooner you can start funding one of these independent 529 plans, the sooner you can lock in the cost of college tuition.
Moving Money Between 529 Plans
Another option you have is to start your college funding account with a state run 529 plan. As your child approaches college age, you might have a better feel for whether or not they will be accepted to one of the more elite private college and universities participating in an independent 529 plan.
Once you're convinced that private college is on the horizon, you can start to move your money from the state 529 plan over to the independent 529. Just be aware that the cost of transferring the assets over to the new plan might be subject to fees and penalties. Make sure you know all of the 529 rules before moving your money.
Congress has made it easier than ever to save for college and independent 529 plans make prepaying tuition a breeze. If you've been thinking about opening a 529 account, there has never been a better time in terms of flexibility, options and the ability to control college costs.
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