Saving for your child’s education is one of the most important financial decisions you can make as a parent. While many people are familiar with the traditional state-sponsored 529 plans, a lesser-known option is the private 529 plan. A private college 529 plan is a prepaid tuition plan that locks in current rates to save on future tuition. In this blog, we explore what private 529 plans are, their benefits, and why they may be an excellent choice for your child’s college savings.
What are private 529 plans?
A private 529 plan is a college savings plan offered by certain colleges and universities. It allows families to pay for and lock in college tuition at today’s rates. It is a prepaid tuition plan that is low-risk and hedges against tuition inflation. If your child plans to attend a participating institution, a private 529 plan may be a fantastic option to consider.
How does a private college 529 plan work?
The private 529 plan is a prepaid tuition plan. 529 accounts are typically opened by parents, or grandparents, with their child named as beneficiary. The contributions are used to purchase tuition certificates for future college tuition and mandatory fees. The certificates are redeemable at any current or future member school. Between July 1 and June 30 of the following year, contributions lock in that year’s tuition and fees rate at each member school. On July 1, all contributions from the previous 12 months go toward the purchase of a single tuition certificate for all member colleges. The rates change on July 1 of every year.
When you prepay tuition, you are essentially paying what you would pay right now if your child was to start college. According to Educationdata.org, the average cost of tuition & fees at private 4-year institutions has risen 124.2% over the last 20 years for an average annual increase of 6.2%. The average tuition at a private university is currently $38,768. If you inflate today’s cost at 6.8% per year over the next 15 years, the cost increases to $104,002 per year. This number doesn’t even include college-related expenses which will also increase with inflation. There are no fees associated with the private 529 account and participating colleges are contractually obligated to honor prepaid tuition for up to 30 years. Every dollar put into the account pays for tuition at current rates. However, you do forgo the potential upside opportunity in the traditional 529 savings plan which gains value when the market rises.
What is the maximum contribution amount?
The maximum contribution amount is the cost of five years of full-time undergraduate tuition and mandatory fees at the highest-cost participating institution. This is currently $332,450 for the PC529 2022-2023 plan year. What is the minimum contribution amount? The minimum contribution amount is $25. However, contributions must reach $500 within two years of opening the private college 529 account. If you choose the installment payment plan, you’ll pay $25 a month over two years to meet this minimum.
What is the minimum contribution amount?
The minimum contribution amount is $25. However, contributions must reach $500 within two years of opening the private college 529 account. If you choose the installment payment plan, you’ll pay $25 a month over two years to meet this minimum.
What are the benefits of private 529 plans?
- Less market risk and no fees: Every dollar that you save pays for your child’s future tuition. No matter how much tuition increases over the years, or what the stock market does, the rates are locked in at all participating schools.
- No income limits: There are no income limits for investors.
- Generous contribution limits: The maximum contribution amount is currently $332,450 for the PC529 2022-2023 plan year.
- Financial aid eligibility: A private 529 plan assets are considered parental assets for financial aid purposes. Parental assets are generally assessed at a lower rate than student assets when determining eligibility for financial aid.
- Tax benefits: Private 529 plans offer valuable tax benefits. The contributions grow tax-deferred and withdrawals are tax-free when used for qualified education expenses. The tax-free growth of your child’s college savings can make a significant difference. Some states offer income tax deductions or credits on contributions. Contributions are also considered completed gifts and qualify for the annual gift tax exclusion.
- No state residency requirements: Unlike some state-sponsored plans that require you to be a resident of the sponsoring state, private 529 plans usually have no residency requirements. This means that you can have a private college 529 plan no matter what state you live in.
Does a private college 529 plan only pay for tuition fees?
The private college 529 plan only buys tuition certificates which are used to pay for the cost of tuition and mandatory student fees. Therefore, you may still want to have a traditional 529 plan to save for other college expenses, such as room and board. The private college 529 plan can be used as an additional, layered approach to saving for college.
How soon can my child redeem their tuition certificate?
A minimum of 36 months must lapse between the initial purchase date of the tuition certificate and the first redemption. Therefore, it does require some pre-planning.
Do I need to know where my child is going to college when I open an account?
No. When you open a private college 529 plan account, you don’t need to know where your child is going to college. As long as the student has a private college 529 account, prepaid tuition can be used at any participating school.
Can participating colleges stop participating in the plan?
Schools can choose to stop participating in the private college 529 plan on a prospective basis only. However, even if the school does withdraw, they are still obligated to honor any tuition certificates that were purchased before the school’s withdrawal.
What happens if my child doesn’t go to a private school?
Below are some options if your child ends up going to a non-member school.
- Assign the account to another beneficiary student.
- Roll the private 529 plan into another traditional state 529 plan.
- Use it for your own education expenses.
- Use a portion to pay for student loans.You may request a full or partial withdrawal. Tuition certificates are only eligible for withdrawal after they have been held for 12 months. Any investment earnings are subject to income tax and an additional 10% penalty tax.
