Washington University in St. Louis is participating in Independent 529 Plan, a new prepaid college tuition plan tailored specifically for private colleges, announced Benjamin S. Sandler, the university’s special assistant to the chancellor.
Independent 529 Plan responds to a national call to make higher education more affordable and more accessible to students, Sandler said. Washington University has joined with more than 200 other private colleges and universities across the country to offer this tax-advantaged way for families to save for tuition.
“An institution’s participation in the plan signals to the public that it understands the financial challenge posed by private college and university costs, and supports programs that help families meet this challenge,” Sandler said.
529 Plans, so named for the section of the IRS code that defines them, have gained in popularity over the last decade. Families have been attracted to these plans because accounts don’t generate federal income tax if used as intended, benefits are transferable to other members of the family, and refunds are available if the child receives a scholarship or decides not to attend college.
For purchasers, the effectiveness of Independent 529 Plan is not dependent on the performance of the stock or bond markets. Rather, contributions are actually pre-purchasing tuition, in part or in whole, at less than today’s prices.
“Regardless of whether a student attends Washington University or another one of the member institutions, Independent 529 Plan represents a way for parents to contribute and pay for private college without worrying about either investment risk or tuition inflation,” Sandler said.
“Independent 529 Plan proceeds can be used at any of the participating colleges. Think of it as buying a shopping certificate for use at any of the stores at a mall,” said Doug Brown, president and CEO of Tuition Plan Consortium, the Albuquerque, N.M.-based nonprofit group that oversees the plan. “Students don’t choose their college at purchase, but after they have applied and are accepted in the regular manner.”
An example of how the plan works: Let’s say private Colleges A and B have agreed to honor certificates purchased under Independent 529 Plan. College A has a tuition cost of $30,000 for this current year and College B, $10,000. A person who makes a $10,000 contribution into Independent 529 Plan this year would receive tuition certificates that would cover 33.3 percent of a year’s tuition at College A or a whole year at College B, regardless of how high tuition may be at the time the student eventually chooses to use the certificates.
In fact, because participating institutions must offer a discount off their current tuition fees, the certificates would cover slightly more tuition at colleges A and B in the example above.
Other features of the plan include:
- The consumer pays no fees of any kind.
- A parent, relative or friend at any income level can establish an Independent 529 Plan for a beneficiary (eventual student) and may also transfer use of the tuition certificates to a wide range of relatives of the beneficiary.
- Accounts can be opened for as little as $25 provided contributions total at least $500 within two years. The maximum lifetime contribution limit is equal to five years worth of tuition at the most expensive participating college in the Plan.
- The number of participating colleges and universities may increase over time.
- Any increase in value realized when a tuition certificate is redeemed at a member college will be free of federal and state taxes. (However, a sunset provision in the current tax law calls for the tax-free features of all 529 plans to end in 2011. Future changes in the law may create adverse tax consequences, or lead to termination of the plan.)
If the beneficiary cannot use the tuition certificates, they can be transferred to a wide range of relatives of the beneficiary, or the adjusted value of the certificates can be rolled over into another 529 plan without penalty. Or, a refund of the amount will be given capped at plus or minus 2 percent of the fund’s performance in any year contributions were made.
The refund may be used to pay for college expenses at non-member institutions without incurring federal income tax or penalties on any investment gains. If, however, the refund is not used within one year or to pay qualified higher education expenses, the account owner will be subject to taxation on any gains and to a 10 percent additional tax.
The purchase of a tuition certificate does not guarantee admission or enrollment at a participating institution, and could reduce the beneficiary’s eligibility for financial aid.
The program’s administration and investment management will be handled by TIAA-CREF, the leading financial institution in the field of 529 plans.
Individuals can open an Independent 529 Plan account at no charge as well as locate member institutions and learn plan features by calling 888-718-7878 or by visiting www.independent529plan.org.