It can be a proud moment for parents when their kid gets accepted to a prestigious private university. That pride, however, can turn to shock when the parents see the price tag. According to the College Board, a membership organization of 4,300 schools, the average annual tuition at a four-year private university for the 2002-03 academic year was $18,273 -- an increase of 5.8% from the previous year.
However, you can make that car-sized pill easier to swallow if you take some action before that fateful day. One option is to participate in the Independent 529 Plan, a program sponsored by more than 200 private schools that allows parents (or other generous donors) to lock in tomorrow's tuition at prices below today's.
The Independent 529 plan is essentially a prepaid tuition plan. Contributions to the plan buy a proportionate amount of future tuition, based on current costs. So if you contribute $15,000 today, that will buy you one year's worth of tuition years down the road at schools that currently charge $15,000 a year -- even if tuition costs much more by the time your child enrolls. That same amount will buy a year-and-a-half worth of tuition at a school that currently charges $10,000, and 75% of annual tuition at schools that now cost $20,000.
But that's not all. Each school must offer an annual discount no lower than 0.5% that compounds each year. An illustration on the plan's website shows how a 1.5% annual discount can reduce a $20,000 tuition to $18,156 after six-and-a-half years.
The Independent 529 Plan, like all prepaid plans, are very different from the more well-known 529 savings plans. In a prepaid plan, participants don't manage the money -- the program does. And participants know how much tuition will be covered by their contributions. With 529 savings plans, however, participants choose how the money is invested from among a menu of mutual funds. How much of the college bill is covered by the plan depends on the success of the underlying investments and the inflation rate of the cost of higher education. That can spell trouble if the investments don't do well and college costs skyrocket, as has been the case over the past few years.
The Independent 529 Plan is most appealing to parents who think their child will attend a member school, and who like the peace of mind that comes with guaranteed tuition coverage. However, that guarantee has its costs. First of all, prepaid plans reduce financial aid eligibility much more than any other type of college savings account.
Secondly, many private schools don't participate. You won't find Harvard, Yale, or Stanford among the member schools -- but you will find Princeton, Notre Dame, and Samford. If you student decides not to attend a member school, the contributions will be returned, plus an annual return in the range of -2% to 2%, depending on the plan's investment performance. If you're a savvy investor who has several years before Junior heads for the ivory tower, you might do better -- and retain more flexibility -- in a 529 savings plan.
Finally, prepaid plans pay just for tuition and mandatory fees, not room and board. For those expenses, you'll have to save separately.
There's much more to know about the differences between college savings accounts. You can learn more in our College Savings Center , and in our recent book, The Motley Fool's Guide to Paying for School : How to Cover Education Costs From K to Ph.D.
