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Independent 529 Plan to launch in September 2003
(August 22, 2003) - The country’s first “institutional” prepaid tuition plan qualifying for federal tax treatment under Section 529 of the Internal Revenue Code is scheduled to launch the first week of September. The Independent 529 Plan has been developed by a consortium of over 200 private colleges and will offer families the opportunity to immediately lock-in a percentage of a participating college’s tuition costs for a future year.
The following discussion represents our understanding of how the Independent 529 Plan will operate, but this is not an official description:
The Independent 529 Plan represents a third type of 529, different from state 529 savings programs and state 529 prepaid programs. It is modeled after the U.Plan, a non-529 tuition program launched by the state of Massachusetts in 1995 (see www.mefa.org).
The Independent 529 Plan tuition certificates will be honored for the paid percentage they represent at the time of purchase at a participating private college—no matter what the tuition cost of the school is at the time of future usage. For example, a $5,000 upfront contribution may buy 30% of future tuition and mandatory fees at College A and 50% of future tuition and mandatory fees at College B. Certificates may be redeemed for college any time between 36 months and 30 years after purchase.
The percentages are set by the participating colleges at the time the tuition certificates are issued, and may not be adjusted later on. Each college is required to “discount” its tuition by at least one-half percent in setting its percentages. This contrasts with many state prepaid programs that are now charging premiums over current tuition levels.
At least $500 in tuition certificates must be purchased within the first two years. The maximum contribution will be based on five years of tuition and fees at the highest-cost college in the program.
The participating colleges, and not the states or their agencies, assume the risk that program investments will not keep up with rising tuition. The amount received by the college when a tuition certificate is redeemed will be based on the net investment performance of the program fund adjusted by allocations to a “stabilization fund.”
Ownership of a tuition certificate will not increase, or decrease, the beneficiary’s chances of getting admitted to any of the participating colleges. The number of colleges joining the Independent 529 Plan is expected to increase over time, providing greater coverage for beneficiaries.
Anytime after one year, the certificate can be refunded to the purchaser, or transferred as a tax-free rollover to another 529 plan. The amount refunded or transferred will be equal to the contributions made, as adjusted by the investment performance of the program trust fund. However, the performance adjustment is limited to plus or minus 2% on an annualized basis.
Students receiving benefits from any prepaid tuition plan, including the Independent 529 Plan, will see their eligibility for federal financial aid severely impacted under current aid formulas. Member colleges will apply their own rules with respect to institutional grants and tuition discounts.
TIAA-CREF will be managing the funds and administering the program. Initially, tuition certificates will only be available directly from the program, and not through intermediaries. Third-party distribution may happen in the future.
The program maintains a web site at www.independent529plan.com.