Opt for the Unique Independent 529 Plan

Physician's Money Digest, July31 2004, Volume 11, Issue 14

Physicians are keenly aware of the value of higher education because it has played such a key role in shaping their professional careers. And within higher education, the nation's private universities and colleges offer students some of the most outstanding educational experiences. Now, over 230 of those private institutions have banded together to offer parents a way to save for tomorrow's tuition at today's prices—and even at a discount— with the Independent 529 Plan.

This unique plan was not started by a financial company or a state sponsor. It exists because a forwardthinking cadre of top private colleges wanted to provide parents with a low-risk way to save for college and to keep pace with the upward tuition spiral. The Independent 529 Plan is compelling to parents interested in having their child benefit from the special advantages of a private college education.

Advantageous Plan

With private college tuition advancing at a relentless 6% average annual pace, purchasing a certificate for a semester's worth of tuition at current prices and then using the certificate 10 years from now constitutes a rare higher education bargain. The tuition purchased today is guaranteed to satisfy costs at the time your child enrolls in school. Tuition is locked in no matter how much the tuition rate rises in the interim or what happens in the investment markets.

The Independent 529 Plan provides the same income, gift, and estate tax advantages as other 529 college savings plans, which proliferated after the 2001 tax law changes. However, most of these plans require an investor to assume some financial market risk or to settle for a relatively modest guaranteed rate of return. In contrast, the contributor to an Independent 529 does not assume investment or tuition inflation risk.

Discounts off of tuition rates make the Independent 529 Plan even more attractive. The median discount rate is 1% for the 2003-2004 program year. Assuming the 6% annual jump in private college tuition remains a trend and colleges offer the average 1% tuition discount, the theoretical return to the account owner is 7% annually until the certificate is used.

Certificate Particulars

Tuition certificates are good at any member school to which the student is admitted. There are already more than 230 colleges and universities participating, offering a wide variety of choices to fit the talents and interests of students, and the list is growing. If the beneficiary does not enroll in a member college, another family member beneficiary can be named, or the funds can be rolled over into a 529 state-sponsored college savings plan.

Refunds are also available, amounting to the value of the funds contributed, plus or minus the actual investment return. The refunds are subject to a maximum return of 2% per year on the upside, with loss protection of 2% per year on the downside.

Contributions to an Independent 529 Plan are made on an after-tax basis. Under current law, there are no federal income taxes due from the individual when the tuition certificate is redeemed at a participating college. The tax status of an Independent 529 Plan, like that of other 529 programs, rests on the 2001 Tax Reform Act, and the tax-free features of the plan are set to expire on December 31, 2010.

At this point, the Independent 529 Plan, like other prepaid tuition plans that some states make available for public universities and colleges, does not enjoy the same status as other 529 plans when it comes to setting eligibility for student financial aid. There are proposals in Congress to provide parity on this front, but passage of such legislation is not assured.

Douglas M. Brown is president and CEO of Tuition Plan Consortium, a 238-member group of private colleges and universities formed to offer subscribers a prepaid tuition plan redeemable at any of the participating schools. For more information, please visit www.independent529plan.org or call 888-718-7878.