The Little-Known Way Parents Are Beating College Tuition Hikes
By Ashlea Ebeling
College tuition is among the biggest expenses families face, but there is a little-known way to lock in tuition prices at lower levels.
The Private College 529 Plan is a cousin of traditional 529 plans, but it works differently: It lets families lock in tuition by buying prepaid tuition certificates at current prices. The prepayments can save thousands of dollars for families with children headed to private colleges, where prices have risen steadily over the years. Nearly 300 private colleges participate in the tax-advantaged plan. Stanford University is one of the 300 private colleges offering the Private College 529 Plan.
The average annual tuition increase at private colleges was 4% between 2000 and 2020, according to the National Center for Education Statistics. On the high end, Stanford University is raising tuition by 7% for next year.
The Private College 529 Plan allows parents of rising college freshmen, for example, to lock in all or part of the tuition for their child’s senior year of college at the rate it was in their senior year of high school. What you save on tuition is tax-free.
“If you have a kid going to a private member college this fall, it is a screaming deal,” said Ann Garcia, a certified financial planner in Portland, Ore., and author of “How to Pay for College.”
The list of participating colleges who own and operate the plan includes Georgetown, Princeton, and Stanford. The plan was launched in 2003 to make private schools more affordable.
Locking in tuition
In state-run or state-sponsored 529 college-savings plans, savers typically choose from a menu of mutual fund investments. The mix grows more conservative as college nears, similar to a target-date fund in a 401(k) retirement plan. Money deposited into the accounts grows tax-free and comes out tax-free when families use it for tuition, room and board, and certain other expenses.
The Private College 529 Plan lets parents put money into an account over the plan year, which runs from July 1 to June 30. At the end of that period, they are granted a tuition certificate tied to the plan year’s tuition rates. Credits are redeemable 36 months after the first deposit.
Whether you buy certificates when your child is young or about to go to college, the idea is that by prepaying tuition, you are hedging against tuition inflation. The average account size is $45,000, said Jonathan Sparling, director of strategic partnerships at the plan.
“Having a risk-free investment vehicle that is guaranteed to keep up with college-tuition inflation is pretty great,” Garcia said.
You lock in however much you are able to contribute. If you contribute $30,000, and that equals one-half of current tuition at a school, you are on the hook for the other half of tuition at the future price when your child matriculates.
Participants in the plans do forgo the bigger potential upside opportunity in traditional 529 savings plans, which gain value if the market rises. Balances in traditional 529 plans declined because of market losses in 2022, even for families invested in conservative portfolios.
The Private College 529 Plan isn’t nearly as popular as traditional 529 plans. Not many people know about them, financial advisers say, and some families don’t want to risk the chance that their child might not attend—or get into—a member school.
Net assets in 529 college savings plans totaled $408 billion in the first quarter of 2023, compared with $334 million in the Private College 529 Plan, according to Paul Curley who tracks 529 data for ISS Market Intelligence.
“It is a hidden gem,” he said.
Several states, including Florida and Michigan, run prepaid tuition plans, but they typically require state residency and are meant to be used at in-state public schools.
No matter how much tuition goes up, the colleges participating in the Private College 529 Plan are bound by contract to honor the prepaid tuition certificates for up to 30 years from the date of purchase, said Sparling.
To lock in the 2022-23 tuition rate, you need to contribute to the Private 529 Plan and buy certificates before July 1.
Contributions made from July 1 through June 2024 buy certificates locking in tuition at the 2023-24 rate. A rising freshman who opens and funds an account this July or August, even if they make the bulk of contributions later in the plan year, can redeem the certificates in August of 2026.
Say the family of a full-pay rising freshman at Stanford locks in the 2022-23 tuition of $57,692 by July 1. That would cover senior year’s tuition no matter how much it goes up. For 2023-24, it has already risen to $61,731.
The private prepaid plan covers tuition and fees only, which is why many families with these plans also invest in traditional 529s, Garcia said. Traditional 529 savings plans also cover room and board, computers, private K-12 and graduate school.
Garcia, whose daughter, Gabi, just graduated from the University of Chicago, bought into the private prepaid plan at the 2018-19 tuition rate of $55,425 and used it to cover Gabi’s senior year when tuition was $61,179. It was like getting a 10% after-tax return over the three years, she said.
“Our timing wasn’t that great,” Garcia said, noting that the University of Chicago was one of many schools that froze tuition for the 2021-22 school year because of the Covid-19 pandemic.
If your child doesn’t attend a member college, you can change the beneficiary to another child or certain other family members. You can also ask the plan to refund your money, with some adjustments.
Dow Jones & Company, Inc.
This June 23, 2023, article was reprinted with permission by Dow Jones. The views expressed herein are those of Ashlea Ebeling and do not necessarily reflect the views of The H Group. This Wall Street Journal article was legally licensed through AdvisorStream.