ICQ 2003/4

The Perfect Gift -- a college education


by Wrexie Bardaglio

Sometimes it seems a daunting task to find just the right present for the children in your life. Now there's one truly valuable gift that can't go wrong, and that will mean more to them as each year passes.

Prepaid college tuition certificates are now available under the new Independent 529 Plan, which locks in today's tuition rates for students who won't attend college for many years. The new plan, officially launched in September 2003, is designed to make a private-college education available to students whose choices might otherwise be restricted to state colleges and universities.

How It Works

In July 2004 Marie, grandmother of 8-year-old James, buys a certificate in the amount of $10,000 in the boy's name.

In August 2014 James enrolls at Ithaca College and tenders his certificate.

The surrender value of the certificate is determined by the percentage value of Ithaca's tuition in the year of purchase (2004 Ithaca tuition = $23,690; $10,000 / $23,690 = 0.4221), and the annual certificate discount rate declared for purchases in that year (say, 2% per year). In 2004 the $10,000 certificate purchase represented 42.21% of one year's tuition at Ithaca.

The guaranteed discount of two percentage points per year (above the percentage increase in tuition increases), compounded, will yield a certificate value in 10 years equivalent to 51.46% of a year's tuition, no matter the size of Ithaca's future tuition increases.

Thus, if Ithaca's tuition increases by an average of 5% per year, by 2014 tuition at Ithaca would be $38,589. So, Marie's expenditure of $10,000 in 2004 would be worth $19,856 at Ithaca College ($38,589 x 0.5146).

The certificate's value at other member institutions can be computed similarly using that institution's tuition rate in the year of purchase and its published discount rate compounded annually.

Any gain in the dollar value of the certificate will be free from federal income tax, as long as the certificate is used for educational purposes.

"The 529 program is all about planning ahead," says Ithaca College's dean of enrollment planning, Larry Metzger, M.S. '87. "The alumni of the participating institutions are the primary market for such a plan. They already understand the value of independent higher education and have an investment in it, and they want to see their children and grandchildren benefit from it as well. The incentive is the security of knowing that when the child is ready to attend Ithaca or wherever, a family won't be faced with a down market and find that the dollars available for college tuition are insufficient to meet their needs."

The Independent 529 Plan allows families to lock in current tuition rates at all of the 230-plus (and growing) participating institutions. Additionally, the plan requires each institution to provide the tuition certificates at a discretionary discount rate of at least 0.5 percent per year -- an additional percentage value beyond each tuition increase that is compounded annually from the time of purchase to the time of redemption. This is meant to give customers incentive to buy when their children are young; the value of the certificate is compounded from the time of purchase to the time of redemption. The discount rate at Ithaca College is currently 2 percent compounded annually.

When families first purchase a certificate, they can select up to five "favorite" colleges they wish to monitor, just for illustrative purposes; their quarterly statements will show the tuition value they've purchased, based on each of the five colleges' tuition and certificate discount rate. These five selections can be changed at anytime and have no bearing on where the child may ultimately attend (in fact there is no guarantee of admission), so the plan is structured to allow contributors to view online the tuition value they've purchased at any of the other participating institutions in the plan.

The minimum purchase price for a certificate is $500; however, parents and grandparents who participate in an automatic purchase arrangement can contribute as little as $25 per month. The maximum contribution is $137,500 per student, an amount sufficient to guarantee five years of tuition at the most expensive of the participating independent colleges.

And just as in state 529 tuition plans, (first established for public colleges and universities in Section 529 of the United States Tax Code, and included in the Taxpayer Relief Act enacted in 1997), the earnings on the funds invested in the plan are tax-deferred and withdrawals are tax-exempt (at least through 2010 under the sunset provision of current law), as long as they are used for educational purposes.

An Independent 529 Plan certificate can be redeemed at any participating college once a student is accepted for admission and enrolls.

Clearly, there is no way to know when children are young whether or not they will be interested in attending any of the private colleges that are plan members. But, Metzger points out, "there is a lot of portability to this plan. The assets remain in the control of the benefactor and can be transferred from sibling to sibling or to any member of the previous account holder's family, including first cousins, or to state 529 and other prepaid tuition plans. And as long as transferred funds are used for educational purposes there are no penalties. However, people need to be aware that there may be restrictions in the various state plans if Independent 529 Plan funds are moved into them.

"I would encourage families to look at the benefits of working in multiple arenas to come up with funds for college," Metzger adds. "Remember, the Independent 529 Plan addresses only tuition costs, not room and board or books. State savings plans can often be used for those expenses. In designing the Independent 529 Plan, at least initially, we didn't want to try to manage more complex costs like meal plans and non-tuition costs."

Metzger adds another caution for families who are exploring funding options for their college-bound offspring. At present, prepaid plans are not treated the same as savings plans when determining eligibility for federal student financial aid. "While we are hoping to change the federal regulation to assure equal treatment among 529 programs," Metzger says, "I would encourage families to seek investment advice if federal aid eligibility is a concern. Our biggest challenge now is to get the prepaid 529 plan equal status with 529 savings plans for the purposes of federal financial aid calculations. The Higher Education Act is being reauthorized in 2004, and this will be one of our main legislative goals along with elimination of the sunset provision."

Metzger, IC's enrollment planning dean since 1996, might also be viewed as one of the deans of the Independent 529 Plan. He recalls attending a meeting of the National Association of Independent Colleges and Universities in September 1997, where he sat in on a presentation by several private companies trying to launch prepaid tuition savings plans. "People were suspect of the for-profit plans," he says. "They saw that their management fees and profit taking could ultimately increase the cost of education."

At that session he learned of the effort by six southern colleges to develop a prepaid tuition savings plan for and by nonprofit institutional members. The idea was attractive because of its potential to eliminate yearly dues for consortium members and to provide direct control of the costs associated with the program's management, ultimately handled by TIAA-CREF, the retirement and savings plan favored by educational institutions. From the beginning Metzger was convinced that a program where colleges would take the investment risk and guarantee the certificate holder a specific tuition level would be an easy sell. "Here was an opportunity to guarantee funding for tomorrow's tuition at today's rates," Metzger explains. "The organizing group held a meeting in December following the NAICU conference. I came home from that meeting and talked to President Williams about it, and she agreed we should join."

Ithaca College was among the earliest institutions to join the consortium, and shortly thereafter Metzger was invited to sit on the membership and recruitment committee. He became a member of the board of directors in 1999, a position he still holds.

Metzger is pleased that the Independent 529 Plan earned one of Business Week's prestigious Best Products of 2003 Awards. And in October the organization received a Congressional citation, House Resolution 378, stating, in part, "Be it resolved, that the House of Representatives recognizes the more than 200 independent colleges and universities that together have addressed the need to help families pay for the increasing cost of attending college by creating the first nationwide prepaid tuition plan."

A contribution to an Independent 529 Plan account may not earn Mom and Dad or Grandma and Grandpa hugs and kisses from the small fry right now, but in time the toys and digital games will end up in the trash or be given away. And the children who played with them, grown up and studying sports management or history, attending a Walkabout Down Under semester or touring Ireland with the Ithaca College Choir, will surely thank their families for planning such a priceless future.

Read more about the plan and find answers to frequently asked questions at Independent 529 Plan


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A. Ozolins, Ithaca College Office of Publications, 27 April, 2004