Private College 529 plans, formerly called Independent 529 plans, have unique features that distinguish them from regular 529 plans. These key differences should be carefully considered before deciding if a Private College 529 plan is the right savings vehicle for your financial goals.
To participate in a Private College 529 plan, you buy certificates worth the amount you pay for them, similar to prepaid tuition. For example, spending $15,000 on a certificate today will “lock in” a percentage of tuition at any of the 270+ participating schools based on their cost schedule and discount rate guaranteed for up to 30 years, protecting your savings from unpredictable market movement and inflation. Unlike regular 529 plans, Private College 529’s are not intended to be an investment, eliminating the concern of how much the account will be worth in the future. Saving for private college can be quite a burden, and Private College 529 plans can be a useful tool in combating the issue of quickly rising tuition rates.
There are a few similarities between standard and private 529 plans. There is no requirement to commit to one of the participating schools upon enrollment and you may change the beneficiary to another qualifying family member. Additionally, if you contribute more than you end up using for your child’s education or withdraw funds for a reason other than paying tuition, there is a 10% penalty to withdraw the funds.
The annual contribution limit for a Private College 529 plan in 2017 is $14,000 per individual or $28,000 for a married couple and the lifetime max contribution limit is $256,500. In standard 529 plans, the lifetime limit varies by state.
There are also disadvantages to Private College 529s. The first is fairly obvious: if you are beginning to save when your child is very young, there is no guarantee your child will be admitted to one of the 270+ participating private schools. Additionally, even if your child is admitted to a private school, there’s no guarantee he or she will want to attend that particular school, which could create additional pressure on the child in the already stressful decision-making process of choosing a college. There’s also no state tax deduction for contributions to a Private 529 plan.
If your child were to either not be accepted into a private school or not wish to attend a private school to which he or she is accepted, what happens to the Private College 529 plan? You are allowed to use your prepaid tuition for a state school, but the tuition certificates will be adjusted based on the performance of the trust fund, which holds the plan’s underlying investments, and growth is limited to 2% per year, which would most likely be a lot less than you would earn using a standard 529 plan and investing in the market. Additionally, the plan may only be used to pay for tuition and mandatory fees, whereas standard 529 plans can be used for any qualified education expense.
In summary, Private College 529’s can provide benefit to those who are confident their child will attend one of the qualified private colleges and would like to avoid market risk while locking in the cost of tuition. Otherwise, these plans carry significant risks that should be carefully weighed against potential benefits. A CERTIFIED FINANCIAL PLANNER™ will be able to help you decide which savings vehicle or combination of savings vehicle will help you accomplish your goals.