If you've ever felt helpless against the rising cost of college tuition, you're not alone. Fortunately, there is an answer to this problem in the form of 529 plans, which offer individuals saving for college a prepaid tuition option. That's great news for parent-investors looking to lock in the cost of college tuition, since it provides their children with a large choice of private colleges and universities.
According to CollegeBoard, the average cost of a four-year private college or university was a little over $49,879 per school year in 2019 / 2020. That figure includes the cost of tuition and fees, which is 2.8% higher than last year's (2018 / 2019) value.
Parents are often faced with the decision to apply for a second mortgage, postpone retirement, or even use their retirement money to help pay for college. For these individuals and many other investors, the ability to lock in the cost of college was a dream. That is, until prepaid college tuition plans became a reality.
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.
Each time the accountholder contributes to the independent 529 plan, the money goes towards tuition certificates. The price paid for each certificate is based on current college costs, and can be redeemed at a future date to pay for tuition in the form of college credits.
The popularity of prepaying tuition is spreading not just among investors, but also among well-known colleges and universities. Stanford, Princeton, MIT, and many other prestigious universities and colleges now participate in such plans.
When participating in an independent 529 plan, the return on investment is not tied to the performance of a fund as it would be with a state run plan. In fact, the best feature of these independent plans is the return on investment is equal to the increase in the cost of college. The overall return is exactly equal to college tuition and fees "inflation."
Here is an example of how prepaid tuition works. To make things easier, let's assume the parent-investor has $70,000 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 2034.
If the cost of college tuition continues to rise at 3.5% (historical rate) for the next fourteen years, the cost of a year at MIT will be over $110,000 in 2034. But the certificate purchased for $70,000 fourteen years earlier entitles the child to one year of tuition at that school.
Let's say the beneficiary of the account (the child) isn't accepted to a prestigious university, now what? Fortunately, these independent 529 prepaid tuition plans provide the account owner with several options. For example, it's possible to:
These prepaid plans are flexible, and they already have rules in-place to accommodate real world problems.
The most important strategy to follow involves setting money aside each year. The sooner a family can start funding one of these independent 529 plans, the sooner they will lock in the cost of college tuition.
One conservative strategy is to start saving for college by funding a state run 529 plan. As the child approaches college age, parents will have a better feel for whether or not they will be accepted to one of the more elite private colleges or universities participating in an independent 529 plan.
Once convinced that private college is on the horizon, it's possible to move 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 may be subject to fees and penalties. Read all of the 529 rules that apply before moving any money between plans.
Lawmakers have made it easier than ever to save for college, and independent 529 plans make prepaying tuition a breeze. Anyone that's been thinking about opening a 529 account should do so now. There has never been a better time in terms of the plan's flexibility, options, and the ability to control college costs.
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