Funding your child’s education is perhaps the most important investment you will make, but unfortunately, the investment industry offers few helpful options. Conventional 529 plans are saddled with high fees and force participants to take on an inappropriate degree of risk, as I’ve written in the past. But a good alternative is now available for funding a private college education.
Over lunch last week, Nancy Farmer, the president of Private College 529 Plan, explained how her offering works.
How it works
In short, participants’ contributions earn credits at any of the 273 participating schools, all of which are private. Credits are based on the current tuition at a specific school. Let’s say your child ultimately attends Boston University, and that school’s tuition was $30,000 at the time of your contribution. A $10,000 contribution pays for one-third of one year’s tuition costs at BU at the time your child is in college.
Your contribution has effectively grown at the rate of increase in that school’s tuition. According to Farmer, private school tuition has been increasing at approximately 5% annually, and data from the College Board confirms her statement.
That’s a great deal – if your child attends a college in Farmer’s plan at the time of your investment, or a college that was added subsequently. You’ve perfectly matched the asset (your 529 plan investment) with the liability (the cost of tuition), and eliminated any risk. Conventional 529 plans fail miserably in this respect; they lead participants to an equity-centric asset allocation that must perform well over the relatively short time college funds are invested (about 10 years), and they don’t match assets with liabilities.
Another problem with conventional 529 plans is that you can change your asset allocation only once a year. With this plan, you don’t need to change (or even monitor) your asset allocation.
Farmer’s list of 273 schools includes one Ivy League institution (Princeton) and many other prestigious schools, among them some of the top research universities (MIT, Stanford) and also small liberal arts colleges (Amherst, Wesleyan and Wellesley, for example). She said the most popular school among participants so far has been Notre Dame.
The participating schools guarantee the tuition credits. If Farmer’s organization goes out of business, the worst case is that your credits can be applied at those schools that were participating at the time you made your contribution.
