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How Private College 529 works
http://www.savingforcollege.com/articles/how-private-college-529-works-1039

Posted: 2017-03-07

by Brian Boswell

Financial Professional Content

Savingforcollege.com recently had the opportunity to dive into the nuts and bolts of how the Private College 529 plan is constructed, distributed, serviced, and managed in an interview with CEO Nancy Farmer and Director of Communication Rich Buckley. 529 plans are rapidly becoming a commoditized product, with similar structures between savings plans whose portfolios are primarily comprised of a combination mutual funds and ETFs with age-based, static, and target risk options. Prepaid plans sponsored by a state guarantee one dollar today will be worth one future tuition dollar tomorrow at in-state schools. But the Private College 529 Plan (the Plan) is a truly unique college savings vehicle that is positioning itself as part of the overall college savings strategy of investors, rather than a standalone savings vehicle. It's also the only plan not sponsored by a state.

Who bears the risk

In any investment, return risk is borne by one of two parties: The investor or the investment. Typically the more risk to the investor, the more return that is required. In 529 savings plans, the investor bears that risk, since the underlying securities are typically mutual funds or ETFs, which in-turn invest in stocks, bonds, and other market securities whose return is not guaranteed. In prepaid plans, the state bears the risk, guaranteeing a minimum level of return.

With the Private College 529 Plan, the risk is incurred by the participating institutions. So if you put in a dollar today, it is worth a dollar for tuition when the beneficiary enters school, guaranteed. Depending on where you sit, this has its pros and cons:

  • From an investor perspective, tuition inflation has typically exceeded consumer inflation, and can be difficult to exceed even in market securities. The guaranteed storehouse of value can be reassuring especially for conservative investors who have some assurance that their child or children will attend a private school in-network. For legacy parents especially, this can make a lot of sense. The risk, of course, is that the student attends an out-of-network or state school or whose application is not accepted to a network school, and foregoes the benefit. Still, having those funds available is a huge incentive to look first to Private College institutions for the prospective student.
  • From the institution's perspective, the downside is minimal. Students with a Private College 529 account at their disposal are much more likely to attend a network school. Even from a pure demand standpoint, participating makes sense. At worst, tuition increases greatly and the student ends up with a great deal, but at the end of the day the school is still only out their service.

How it works

Every institution reports their rates to the Private College 529 Plan on a regular basis, typically when their members change their tuition rates on July 1 each year. The Plan takes all that information and indexes it in their proprietary system. When deposits are received, they are indexed against the tuition rates on that day, and unitized across all participating institutions. This way, when a participant logs in they can view what their contributions are worth at the various schools. A dollar deposited today will be worth more as a percentage of tuition at Hope College, whose tuition is around $30,000 versus Princeton where tuition is over $40,000. So if the participant deposits $1,000 today and it is worth one unit at Hope College, it will only be worth 0.75 of a unit at Princeton, on a relative basis. Then again, your dollar is also worth proportionately less, so it's not a good deal or a bad deal, it's just being indexed appropriately.

Indexing the value allows students to transfer between schools, as well. So if the student attends Hope College for two years and transfers into Princeton for the last two years, they gain the benefit of the lower cost of Hope College against their Private College 529 Plan account credit for the first two years. This is similar to the strategy of attending a community college for two years before transferring the credits into a more prestigious four-year school, only inside the Plan network. The only stumbling block to watch out for is to make sure that the funds deposited have had at least three years to vest, meaning the account owner cannot draw on the account until the funds have been invested for 36 months.

Construction and distribution of the Plan

The Private College 529 Plan contracts with OppenheimerFunds as the plan manager. OppenheimerFunds provides all the back-office functions of the plan. They custody the funds, provide transaction agent (TA) services, recordkeeping, customer service, and other administrative functions. The Plan also contracts with OppenheimerFunds to pool the assets of the plan into a qualified trust, and to manage its investments in accordance with the direction of the Private College 529 Plans investment committee. OppenheimerFunds is compensated through a combination of primarily flat fees and a smaller asset-based fee for management.

These costs are only incurred indirectly by the participant, since their investment return is guaranteed to participating institutions. It's really the member schools that pay the fees. Operating costs such as those used to subcontracting costs to OppenheimerFunds, staff salaries, marketing costs, etc. are paid via the trust.

Private College 529 Plan is marketed directly to savers primarily through digital and social media. With a limited marketing budget, it's critical for the Plan to focus their marketing efforts on the most effective channels. There has been some interest expressed by RIAs, and the plan can send duplicate statements to advisors, but it's not really designed as an advisor-sold product. There is no structure in place to compensate commission-based advisors, and it would bring another level of regulation into place to do so.

RELATED: Private College 529 and college savings plans: A perfect pair

How institutions join the consortium

The Private College 529 Plan had about 250 participating institutions when it launched in 2003, and is now owned and operated by 284 colleges and universities. The Private College 529 Plan adds about five institutions to its partnership each year. It is a largely informal, educational process where the board members of the Plan are networking with peers to bring additional institutions into the fold. The Board of Directors is comprised of representatives from member schools such as the University of Notre Dame, Duke University, and Stanford, so their network is wide-reaching, but there are thousands of private schools across the country, and limited bandwidth to engage and vet new members. Hence, you get about five new schools per year.

Private College 529 Plan member institutions:

  • Must be four-year degree granting schools
  • Must meet basic federal guidelines
  • Cannot be a for-profit institution

There is no expiration on the contracts with member institutions, but there are rare cases where a plan can be removed from participating. For example, years ago the College of Santa Fe transitioned to a for-profit institution. As a result, it was removed from the Private College 529 Plan consortium.

Financial Aid

Contributions to the Plan are indexed to different schools at different rates, so how are deposits valued when filing for federal aid? This gets a little fuzzy, because the Plan has not given any clear guidance to participants on how to report those assets. The plans could be reported based on the tuition value, market value, or redemption value, for example. The Private College 529 Plan distances itself from this aspect, since it is not involved in the financial aid process, and leaves it to the filer to decide how best to value those assets.

The schools themselves are required to treat Private College 529 Plan participants the same as any other student by contract. Different schools will have different methodologies for determining need- and merit-based aid, but it needs to be the same between students regardless of Plan participation.

How payments are made

From a participant perspective, it's a fairly simple process to withdraw funds to a member school. There is a one-page form to complete and fax in to the Plan. At that point the participant is done. The Plan takes over, contacting the institution with the requisite information so the school can credit the student's tuition. The actual amount paid by the trust itself to its member school will vary depending on the date of deposit and the dollar's value. The school receives a check for the market value of the tuition units the participant has earned.

So if the participant has saved 0.75 of a year, the institution is required to credit them for 0.75 of a year. So if tuition is $10,000, the participant is credited $7,500 towards their tuition. However, the school itself might receive more or less from the trust, depending on the value of the initial contribution made by the participant against the index. So in a down market the school might only receive $7,200, or in an up market could receive $7,700 from the trust. This is why the institution bears the return risk, rather than the participant. At the end of the day, though, the school still has a student that they might not have otherwise had, because they have participated in the Private College 529 Plan.

Investors' college savings deserves a complement

Private College 529 Plan only covers the cost of tuition and mandatory fees at member schools. So the cost of fees, books, supplies, computers, room, board, and other costs that are covered by savings plans will not be covered here. This is why the plan recommends using the Private College 529 Plan alongside a 529 savings plan. This is a smart strategy, diversifying the risk of the saver between the two savings vehicles, and mitigating some of the market risk associated with the savings plan as well as the network risk of the Private College 529 Plan.

Like savings plans, the beneficiary can be changed at any time. Worst case scenario: The assets can be withdrawn or rolled into a savings plan with a maximum annual gain of 2% or loss of 2%.


Nancy Farmer, President and Chief Executive Officer

Nancy Farmer became the President and CEO in 2005. Prior to this position, she spent 20 years in public service, beginning as executive director of a nonprofit neighborhood organization in the 1980s. She then served three terms as an elected member of the Missouri House of Representatives, after which she was appointed Deputy to the Missouri State Treasurer, managing the day-to-day operations of the Treasurer's office. In 2000, she was elected as Missouri State Treasurer, where she actively promoted the state's 529 savings plan.

Editor's note: This article is NOT sponsored, but Private College 529 Plan is a sponsor of Savingforcollege.com.

Financial Professional Content

Savingforcollege.com recently had the opportunity to dive into the nuts and bolts of how the Private College 529 plan is constructed, distributed, serviced, and managed in an interview with CEO Nancy Farmer and Director of Communication Rich Buckley. 529 plans are rapidly becoming a commoditized product, with similar structures between savings plans whose portfolios are primarily comprised of a combination mutual funds and ETFs with age-based, static, and target risk options. Prepaid plans sponsored by a state guarantee one dollar today will be worth one future tuition dollar tomorrow at in-state schools. But the Private College 529 Plan (the Plan) is a truly unique college savings vehicle that is positioning itself as part of the overall college savings strategy of investors, rather than a standalone savings vehicle. It's also the only plan not sponsored by a state.

Who bears the risk

In any investment, return risk is borne by one of two parties: The investor or the investment. Typically the more risk to the investor, the more return that is required. In 529 savings plans, the investor bears that risk, since the underlying securities are typically mutual funds or ETFs, which in-turn invest in stocks, bonds, and other market securities whose return is not guaranteed. In prepaid plans, the state bears the risk, guaranteeing a minimum level of return.

With the Private College 529 Plan, the risk is incurred by the participating institutions. So if you put in a dollar today, it is worth a dollar for tuition when the beneficiary enters school, guaranteed. Depending on where you sit, this has its pros and cons:

  • From an investor perspective, tuition inflation has typically exceeded consumer inflation, and can be difficult to exceed even in market securities. The guaranteed storehouse of value can be reassuring especially for conservative investors who have some assurance that their child or children will attend a private school in-network. For legacy parents especially, this can make a lot of sense. The risk, of course, is that the student attends an out-of-network or state school or whose application is not accepted to a network school, and foregoes the benefit. Still, having those funds available is a huge incentive to look first to Private College institutions for the prospective student.
  • From the institution's perspective, the downside is minimal. Students with a Private College 529 account at their disposal are much more likely to attend a network school. Even from a pure demand standpoint, participating makes sense. At worst, tuition increases greatly and the student ends up with a great deal, but at the end of the day the school is still only out their service.

How it works

Every institution reports their rates to the Private College 529 Plan on a regular basis, typically when their members change their tuition rates on July 1 each year. The Plan takes all that information and indexes it in their proprietary system. When deposits are received, they are indexed against the tuition rates on that day, and unitized across all participating institutions. This way, when a participant logs in they can view what their contributions are worth at the various schools. A dollar deposited today will be worth more as a percentage of tuition at Hope College, whose tuition is around $30,000 versus Princeton where tuition is over $40,000. So if the participant deposits $1,000 today and it is worth one unit at Hope College, it will only be worth 0.75 of a unit at Princeton, on a relative basis. Then again, your dollar is also worth proportionately less, so it's not a good deal or a bad deal, it's just being indexed appropriately.

Indexing the value allows students to transfer between schools, as well. So if the student attends Hope College for two years and transfers into Princeton for the last two years, they gain the benefit of the lower cost of Hope College against their Private College 529 Plan account credit for the first two years. This is similar to the strategy of attending a community college for two years before transferring the credits into a more prestigious four-year school, only inside the Plan network. The only stumbling block to watch out for is to make sure that the funds deposited have had at least three years to vest, meaning the account owner cannot draw on the account until the funds have been invested for 36 months.

Construction and distribution of the Plan

The Private College 529 Plan contracts with OppenheimerFunds as the plan manager. OppenheimerFunds provides all the back-office functions of the plan. They custody the funds, provide transaction agent (TA) services, recordkeeping, customer service, and other administrative functions. The Plan also contracts with OppenheimerFunds to pool the assets of the plan into a qualified trust, and to manage its investments in accordance with the direction of the Private College 529 Plans investment committee. OppenheimerFunds is compensated through a combination of primarily flat fees and a smaller asset-based fee for management.

These costs are only incurred indirectly by the participant, since their investment return is guaranteed to participating institutions. It's really the member schools that pay the fees. Operating costs such as those used to subcontracting costs to OppenheimerFunds, staff salaries, marketing costs, etc. are paid via the trust.

Private College 529 Plan is marketed directly to savers primarily through digital and social media. With a limited marketing budget, it's critical for the Plan to focus their marketing efforts on the most effective channels. There has been some interest expressed by RIAs, and the plan can send duplicate statements to advisors, but it's not really designed as an advisor-sold product. There is no structure in place to compensate commission-based advisors, and it would bring another level of regulation into place to do so.

RELATED: Private College 529 and college savings plans: A perfect pair

How institutions join the consortium

The Private College 529 Plan had about 250 participating institutions when it launched in 2003, and is now owned and operated by 284 colleges and universities. The Private College 529 Plan adds about five institutions to its partnership each year. It is a largely informal, educational process where the board members of the Plan are networking with peers to bring additional institutions into the fold. The Board of Directors is comprised of representatives from member schools such as the University of Notre Dame, Duke University, and Stanford, so their network is wide-reaching, but there are thousands of private schools across the country, and limited bandwidth to engage and vet new members. Hence, you get about five new schools per year.

Private College 529 Plan member institutions:

  • Must be four-year degree granting schools
  • Must meet basic federal guidelines
  • Cannot be a for-profit institution

There is no expiration on the contracts with member institutions, but there are rare cases where a plan can be removed from participating. For example, years ago the College of Santa Fe transitioned to a for-profit institution. As a result, it was removed from the Private College 529 Plan consortium.

Financial Aid

Contributions to the Plan are indexed to different schools at different rates, so how are deposits valued when filing for federal aid? This gets a little fuzzy, because the Plan has not given any clear guidance to participants on how to report those assets. The plans could be reported based on the tuition value, market value, or redemption value, for example. The Private College 529 Plan distances itself from this aspect, since it is not involved in the financial aid process, and leaves it to the filer to decide how best to value those assets.

The schools themselves are required to treat Private College 529 Plan participants the same as any other student by contract. Different schools will have different methodologies for determining need- and merit-based aid, but it needs to be the same between students regardless of Plan participation.

How payments are made

From a participant perspective, it's a fairly simple process to withdraw funds to a member school. There is a one-page form to complete and fax in to the Plan. At that point the participant is done. The Plan takes over, contacting the institution with the requisite information so the school can credit the student's tuition. The actual amount paid by the trust itself to its member school will vary depending on the date of deposit and the dollar's value. The school receives a check for the market value of the tuition units the participant has earned.

So if the participant has saved 0.75 of a year, the institution is required to credit them for 0.75 of a year. So if tuition is $10,000, the participant is credited $7,500 towards their tuition. However, the school itself might receive more or less from the trust, depending on the value of the initial contribution made by the participant against the index. So in a down market the school might only receive $7,200, or in an up market could receive $7,700 from the trust. This is why the institution bears the return risk, rather than the participant. At the end of the day, though, the school still has a student that they might not have otherwise had, because they have participated in the Private College 529 Plan.

Investors' college savings deserves a complement

Private College 529 Plan only covers the cost of tuition and mandatory fees at member schools. So the cost of fees, books, supplies, computers, room, board, and other costs that are covered by savings plans will not be covered here. This is why the plan recommends using the Private College 529 Plan alongside a 529 savings plan. This is a smart strategy, diversifying the risk of the saver between the two savings vehicles, and mitigating some of the market risk associated with the savings plan as well as the network risk of the Private College 529 Plan.

Like savings plans, the beneficiary can be changed at any time. Worst case scenario: The assets can be withdrawn or rolled into a savings plan with a maximum annual gain of 2% or loss of 2%.


Nancy Farmer, President and Chief Executive Officer

Nancy Farmer became the President and CEO in 2005. Prior to this position, she spent 20 years in public service, beginning as executive director of a nonprofit neighborhood organization in the 1980s. She then served three terms as an elected member of the Missouri House of Representatives, after which she was appointed Deputy to the Missouri State Treasurer, managing the day-to-day operations of the Treasurer's office. In 2000, she was elected as Missouri State Treasurer, where she actively promoted the state's 529 savings plan.

Editor's note: This article is NOT sponsored, but Private College 529 Plan is a sponsor of Savingforcollege.com.

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