The Independent 529 Plan is a national prepaid tuition plan exclusively for a select list of private and independent colleges. Created in 1998 by a group of 18 southern colleges, it now has over 247 participating private colleges in 38 states and the District of Columbia. Its members include a wide range of institutions including large research institutions (Stanford, University of Chicago), traditional liberal arts colleges (Amherst, Middlebury), women’s colleges (Smith, Wellesley), historical black colleges (Spelman, Dillard), religiously-affiliated colleges (Notre Dame, SMU), and technically-oriented institutions (Rice, MIT). A full list of colleges and universities currently participating can be found at www.independent529plan.org.
The allure of Independent 529 Plans is that a parent or grandparent can lock in future tuition costs at less than today’s price. Member colleges offer discounts to current year tuition rates, typically between 0.5% and 1%. When an account is established, the account owner will ‘choose’ a college from the list of schools currently participating and base their contributions on that school’s current discount and tuition rate. The college chosen as a benchmark has no bearing on admission to that school. It simply establishes a starting point for future contributions. Account owners will have the opportunity to select up to five ‘sample’ colleges to monitor. Quarterly reports will be sent to the account owner displaying the value of the account in terms of the accumulated tuition benefit based on these ‘sample’ colleges.
To illustrate, if the account owner chooses to base their contributions on the current tuition of the University of Notre Dame, and Notre Dame currently offers a 0.5% annual discount through the Plan, then the account owner will know that a payment of $35,135 today will pay for one year’s tuition at Notre Dame 10 years from now ($36,847 ‘08-09 tuition less 0.5% discount annually over 10 years = $35,135). Assuming the annual increase in college tuition remains at 6%, one year’s tuition at Notre Dame ten years from now will be close to $66,000. Therefore, by prepaying $35,135 today, the account owner will realize a tax-free savings of almost $31,000.
This unique way of paying for college tuition offers the security of a guarantee against tuition inflation and the flexibility to choose from some of the nation’s top colleges.
There are certain contribution limits to Independent 529 Plans. The most that can be contributed in any given account is based on five years of undergraduate tuition at the highest-priced participating institution in the program today. For the 2008-09 program year the maximum lifetime contribution limit was $183,000.
As is the case with State-Sponsored 529 Plans and Prepaid Tuition Plans, the Independent 529 Plan offers potentially significant estate and gift tax benefits. For 2009, the annual gift tax exclusion is $13,000, meaning any individual is able to gift this amount to any number of individuals during the year without triggering a gift tax in that year. If you are married, your spouse may elect to split the gifts made to purchase a tuition certificate for a beneficiary, thereby doubling the amount of the annual gift tax exclusion from $13,000 to $26,000. All 529 Plans benefit from a 5-year averaging provision with contributions, meaning you can elect to treat up to $65,000 as having been made in 5 equal gifts of $13,000 over a 5-year period. If married and file a joint tax return, this amount can double to $130,000. Caution must be taken if you are able to take advantage of this provision – no additional contributions can be made by the account owner, and spouse if applicable, to the account over the next five years. Any additional contributions made during the five-year period by the account owner and/or spouse could result in gift taxes being owed in the year of excess contribution.
With the growing popularity of the Independent 529 Plan, more private colleges will be adding their names to the list of participating institutions in the years to come. These institutions, when added to the list, are obligated to honor all certificates purchased prior to its inclusion in the Plan, provided the beneficiary is admitted into the college or university. What happens when a college or university removes itself from the list of participants? If a college should ever withdraw from the Independent 529 Plan, it would still be obligated to honor all certificates that were purchased prior to its withdrawal. No certificates purchased after its withdrawal will be honored by that specific college.
Certificates purchased can only be redeemed for undergraduate tuition and mandatory fees at participating institutions. Mandatory fees are those fees required to be paid by all students attending the particular college as a condition of enrollment. Currently, costs for other expenses including room and board, text books, supplies, and miscellaneous expenses are not covered under the Independent 529 Plan. Once a certificate is purchased, it must be held for 36 months before it can be used. Further, the certificates must be used within 30 years from the date of purchase or else it will mature. Once a certificate matures the account owner has the following options:
Receive a refund, explained below, and retain all the tax benefits for the withdrawal portion if used for qualified higher education,
You can change the beneficiary, or
You can roll over an Independent 529 Plan account tax-free into a state-sponsored 529 plan.
A refund may be received at any time after the one-year (12 calendar months) anniversary of purchase, adjusted for fund performance. As with any 529 program, if you do not use the money for qualified higher education expenses, any increase in the value of your initial purchase amounts (the difference between your contribution amount and the amount refunded) will be subject to federal income tax as well as an additional 10% tax. If you take a refund, rather than redeem your certificates for its intended purpose, the refund will be adjusted based on the net performance of the Program Trust, subject to a maximum increase of 2% per year and a maximum loss of 2% per year.
What happens if the student receives a scholarship or decides not to attend college at all? If the student receives a scholarship that covers the costs of qualified expenses, you can withdraw the funds from your account up to the amount of the scholarship without penalty or additional tax. Earnings that are refunded due to scholarships are taxable income but are not subject to the 10% additional federal income tax. If the student decides not to go to college, you still have options:
You can leave the account open for future use – for up to 30 years,
You can change the beneficiary to another ‘member of the family,’ within the federal 529 rules, or
You can take a refund adjusted for fund performance.
Financial aid concerns must also be considered if you are not able to fully you’re your child’s education. Congress has passed a new law that significantly improves the financial aid rules governing prepaid 529 plans. Simply put, Independent 529 Plan accounts are now treated the same as any other parent asset, including 529 savings plans. This new law means that, beginning in 2006, prepaid 529 plans — such as the Independent 529 Plan — will no longer be treated as an available student resource when determining your potential financial aid award. Now, no more than 5.6% of your 529 college savings will be used to assess need if you apply for financial aid under federal guidelines.
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