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In a recent survey, 87% of parents told Saving for College that a college education is important for their children, and 96% expect their children to continue their education after high school. Many will start putting money away in a 529 savings plan well before high school graduation. But if you think one of these private colleges and universities might be in your child’s future, putting some of your funds into a 529 prepaid plan, specifically Private College 529, could help boost your savings and reach your goals even faster.
Instead of choosing one type of 529 plan over the other, you may want to consider a savings plan as a complement to Private College 529.
Private College 529 Plan allows families to lock in current tuition rates. Account owners purchase tuition certificates that cover a percentage of current year tuition and fees at any of their nearly 300 colleges. The certificates are guaranteed for 30 years, and if your child decides not to attend a participating school, you have the option of changing the beneficiary, rolling the funds into a state-sponsored 529 plan or requesting a refund.
Private College 529 offers many of the same benefits as a traditional 529 plan, like tax-free withdrawals when the funds are used to pay for qualified expenses. Accounts owned by a dependent student or one of their parents have minimal impact on financial aid eligibility, while accounts owned by a grandparent are not considered at all on the FAFSA. Grandparents can use their accounts as an estate-planning tool, by contributing as much as $18,000 per year per individual without incurring gift taxes (or $36,000 as a married couple). You can even choose to “superfund” a 529 account with up to five years’ worth of contributions in one year. This allows grandparents (or anyone else) to contribute up to $90,000 per year per individual ($180,000 as a married couple) without counting against their lifetime gift tax exemption.
What’s more, Private College 529 offers families peace of mind. No matter how much tuition prices rise, or what happens in the financial markets, your prepaid tuition is guaranteed by the participating schools. This is quite different from a 529 savings plan, which hinges on the performance of its underlying investments.
Here’s how combining these two vehicles can be an effective way to finance a college education.
Private College 529 Plan is specifically designed to save families money on annual tuition and mandatory fees by locking in current rates at participating schools. If you pair Private College 529 with a 529 savings plan, you could cover a range of expenses including housing, food and books.
According to a study by the College Board, the estimated annual cost per student for housing and food at private, four-year schools is $14,650, and books and supplies will run you another $1,250.
Even if your student commutes, the expenses will add up, so having a Private College 529 account and 529 savings is a good strategy. Plus, withdrawals from both plans are tax-free when used for qualified education expenses, like what we just mentioned.
Diversify your investments
When planning for retirement, you wouldn’t put all of your eggs in one basket – would you? Just like retirement, it’s important to deploy a diversified education portfolio. A Private College 529 account acts as a fixed asset, protecting principal from market downturns. While a 529 savings plan – heavily weighted toward stocks and carrying some risk – offers great potential rewards.
Combining the two types of accounts can offer you the best of both worlds.
Mitigate risk as your child gets closer to college
When you enroll in a 529 savings plan, you typically have to select the underlying investments for your account based on your risk tolerance and individual goals. If you select an age-based portfolio, your plan will automatically shift toward more conservative investments as your child gets closer to college. Some parents will choose a target risk or individual portfolio and will manually adjust allocations as their time to college draws near.
But instead of switching to a fixed income investment within the same or another 529 savings plan, why not roll some or all of the funds into a Private College 529 account during these final years of saving? 529 account owners are allowed one tax-free rollover per beneficiary in a 12-month period and two investment changes per calendar year.
Keep in mind, however, tuition certificates from a Private College 529 account must be held for at least 36 months before they can be redeemed. That means you’ll want to start thinking about moving funds over during your child’s sophomore year of high school.
Timing is important
As far as when you’ll want to open an account, the Private College 529 plan year runs July 1 – June 30. While you can open an account anytime, contributions before July 1st lock in current rates before they’re likely to increase.
