Although how to pay for children’s college remains a pressing concern for American families, most are unfamiliar with the pre-paid savings plans provided by federal and state governments to assist with the task. Also known as 529 plans, they offer similar tax advantages to Roth Independent Retirement Accounts and provide two options to allow parents to tailor their funds to their own needs.
The additionally known is really a traditional 529 account which grows based on investment returns and allows withdrawals once the child in whose name the account has been created reaches college age. However, many states C along with the federal government C offer a pre-paid option for those hoping their kids attend private colleges. This type of 529 plan allows families to lock in today’s tuition rates in excess of 270 private colleges and universities around the country.
“Families bring about a trust and obtain a certificate representing a share of tuition at current rates, a proportion that remains constant even as tuition rises,” says Nancy Farmer, president and CEO from the Private College 529 Plan, a private college savings plan.
“So, for example, if you were to pay in $10,000, and also the tuition at a given college were $40,000, the certificate you bought would be worth a quarter of one year’s tuition at that college,” she says. “If, in 10 years, the tuition is $60,000, your certificate would be worth a fourth of that amount, or $15,000. Money should be in the arrange for a three-year vesting period prior to it being used.”
If the current rates of tuition growth continue over the next decade, benefiting from a pre-paid plan could translate to substantial savings down the road. US News & World Report explains that parents who managed to put away $27,230 into their pre-paid 529 plan would receive a certificate \”redeemable\” for any year of tuition at New Jersey’s Princeton University which could cost more than $40,000 ten years from now. This represents a 50% increase in value over 10 years.
Certificates can wind up worth more if purchased in June than July. For example, if parents buy tuition certificates this month, they’re buying tuition in the 2012-2013 cost to be used whenever the student attends school later on at that year’s rates, Farmer says.
Since tuition will probably rise in July for 2013-2014, you will see a smaller distinction between the cost of tuition within the 2013-2014 school year so when the student uses the funds. Credits work at any of the colleges that have fun playing the plan, so it doesn’t matter which of these schools students picks, she says.
Farmer notes that the pre-paid 529 plan has some protection to parents whose kids wind up enrolling in a public school instead. The cash can be withdrawn in the plan without any more than a 2%-4% loss in value.