Should you use prepaid college tuition plans?

As more schools sign on, the guarantees and tuition cost savings grow more attractive.

By Liz Skinner

Jan 14, 2015 @ 12:01 am EST

With more than a dozen Midwestern liberal arts schools recently joining the Private College 529 Plan, the nation's only prepaid college tuition plan sponsored by private schools, you need to weigh the pros and cons of using such plans.

All 14 liberal arts schools that make up the Associated Colleges of the Midwest, including Colorado College, Lawrence University and St. Olaf College, are now part of the prepaid tuition program, said Nancy Farmer, president of Private College 529 Plan.

The program allows parents to buy certificates that can be cashed in for tuition at the schools, locking in today's tuition rates. To date, 278 colleges and universities, including Princeton University, Wake Forest University and Stanford University, are part of the 12-year-old program.

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“The notion of affordability is high on people's minds right now," Ms. Farmer said. “The plan offers a savings on tuition costs for those who want this opportunity for their future students.”

The certainty of knowing they have paid for tuition, or a certain percentage of tuition, also is an important feature to many of the more than 6,000 families who have accounts.

In fact, about 54% of plan holders said "guaranteed prepaid tuition" was the top reason they invested, while a third of account holders pointed to the savings they receive on the future cost of tuition as the No. 1 reason they have bought into the program, according to a survey of 880 account holders released Dec. 23.

Those who favor the plan like the benefits of not having to worry about market returns, as well as the protection from college tuition price hikes.

“The guarantee against college tuition inflation and the breadth of schools is terrific,” said Wil Smith, director of wealth management for Crown Wealth Management.

Mr. Smith recommends clients who need to save for college consider the Private College 529 Plan, and he has accounts for his own two young sons.

Advisers who recommend these accounts do not receive any fees from the plan, though account holders can choose to have their adviser sent a copy of their statements, Ms. Farmer said.

The Private College 529, which has about $310 million in assets, was created under the same Internal Revenue Service code as the nation's Section 529 college savings plans. Investors have about $217 billion in those savings plans as of Sept. 30, 2014, according to Strategic Insight.

With 529 college savings plans, account holders or advisers choose how the funds are invested and therefore take on the investment risks. They also usually don't lock in a tuition price. Returns on the funds are not taxed as long as the money is used for college costs. Funds from the savings plans can be used at any college or university.

Some states also have a prepaid 529 plan, which allows savers to pay for all or part of the cost of public college education in that state.

Funds in both the Private College 529 plans and the prepaid state plans can be converted for use at other schools, but the investor gets the biggest benefit using them at the schools that are part of those particular programs.

If the funds in either a standard 529 or a prepaid plan are not used for qualified higher-education expenses, account holders will have to pay income taxes and a 10% penalty on the difference between the contribution amount and the amount refunded.

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