Independent 529 Plan a possiblity

Independent 529 Plan a possiblity

by Shara Tibken

Imagine a world where tuition rates are frozen. It is hard toimagine that a person could pay the amount that is charged for acollege education in 2003, 10 years later.

This world is now possible and colleges across the nation areallowing parents to pre-pay for their children’s education. Thisprogram, known as the Independent 529 Plan, will allow parents tomake monthly payments toward the future educations of theirchildren. These monthly payments can be as low as $25, but theymust total at least $500 within two years. Instead of paying thecollege of choice directly, the purchaser buys tuitioncertificates. These certificates can then be used to pay foreducation in the future.

“The big advantage to this is that it locks in a specifiedpercent of tuition,” said Ken Birkenholtz, vice president forbusiness and finance at Simpson.

According to Birkenholtz, the parents are actually buying apercentage of the tuition at the current rate. For example, if aparent pays $5,000 of a $10,000 tuition rate, that parent hasbought 50 percent of the tuition. In 20 years, if the tuitiontotals $30,000, the student actually receives $15,000 from the planfor the education, totaling the percentage already purchased. Thestudent and parents must pay the remaining percentage of thetuition that is left when the student begins to attend college.When the time comes, the student can choose from any of over 200member colleges. If the child does not want to attend college, themoney will be refunded.

According to Birkenholtz, the certificates will be reimbursedalong with the investment return with a cap of a maximum gain orloss of two percent each year. The certificates can also be givento other family members if the student who was pre-paid for decidesnot to attend college or is not accepted to the participatingcolleges. Currently, seven colleges in Iowa have signed on toparticipate in this endeavor. These colleges include CentralCollege, Graceland University, Loras College, Luther College,Northwestern College, Waldorf College and Wartburg College.

“We have known about this for at least two or three years,” saidBirkenholtz. “Until recently, this did not yet have approval fromthe IRS. This approval fairly recently happened.”

Simpson has not yet decided to participate in this plan, but thecollege is currently considering joining the Independent 529Plan.

“We have to consider if this will be providing benefits to thestudent and the school,” said Birkenholtz.

According to Birkenholtz, it would cost the college $15,000 tojoin the Independent 529 Plan.

“Schools are accepting investment risks [by becoming part of theIndependent 529 Plan], because if investments are poor, schoolslose,” said Birkenholtz. “For the private college 529 plan,investment risk is with the college. If investment return is higherthan tuition increases, the college will gain. If investment returnis lower than tuition increases, the 529 plan participant willbenefit.”

Birkenholtz said stocks rise about 11 percent each year, whilethe rate of tuition at Simpson increases only 5 percent each yearon average. According to The Des Moines Register, tuition ratescould possibly double within the next 20 years in private collegesacross the nation.

“It would be a benefit to students because they can lock in theprice it is now, since tuitions are getting so high,” said freshmanAmanda Sheller. “This may also not be as good as it looks. Studentscan only choose from about 200 colleges in the network. Parentsmight pressure them to attend those schools and start the collegeprep process early.”

The Independent 529 Plan being put into practice now isdifferent from the other 529 plans because it allows individuals tolock in a percentage of the tuition. There is no deadline for whenSimpson must decide to participate or not in the plan.