 529
prepaid plans more compelling now
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Last week's passage of the Deficit Reduction Act of
2005 is all but a done deal, merely waiting for a presidential signature.
While the legislation contains provisions that hurt college financial
aid (and other social) programs, it does contain a "silver
529 lining," says 529 plan expert Joseph Hurley.
"Money moved from an UGMA/UTMA account into a
529 plan will no longer be considered a student asset in the financial
aid formula," Hurley told attendees last week at a 529 plan
conference in Coconut Grove, Fla. Hurley, who founded the Web site
savingforcollege.com, writes the "College
Money Guru" column for Bankrate.com.
Instead, it will be considered a parental asset,
a good thing because only about 6 percent of parental assets are
counted in the federal formula that determines the expected family
contribution toward college costs. Meanwhile, a much larger portion
-- 35 percent -- of student assets count, though this is scheduled
to decrease to 20 percent beginning with the 2007-2008 school year.
More interesting is that prepaid tuition plans, the
forerunners of 529 college savings plans, will now be treated as
parental assets in the computation of the financial-aid formula.
That's great news for families who purchased a prepaid tuition plan.
Previously, these plans were penalized from a financial
aid perspective because they resulted in a dollar-for-dollar reduction
in the cost of attendance, reducing eligibility for financial aid.
Their treatment as a parental asset becomes effective in July.
Prepaid plans not a red-haired
stepchild
For whatever reason, prepaid tuition programs seem to get little
attention among college savings vehicles, as if 529 savings plans
were superior in every way. But in my view, locking into and paying
tuition costs ahead of time offers a lot of advantages -- particularly
in an environment where annual tuition inflation rises at more than
twice the rate of regular inflation as measured by the consumer
price index. You may not be paying today's tuition rates tomorrow,
since future tuition costs are factored somewhat into the price
of these prepaid plans, but you won't have to worry so much about
spiraling costs.
Proponents of 529 savings plans say there's always
a chance that investment returns will keep up with and possibly
beat rising tuition costs, but that seems like poppycock to me.
Yeah, there's always a chance that you might win the lottery,
too.
That's not to say that you shouldn't invest in 529
savings plans. The prepaid tuition plans for the most part only
cover tuition costs for in-state schools. That represents a substantial
portion of college costs, but certainly not everything. Students
need food, shelter, books, a computer, notebooks, supplies, etc.,
to stand a chance of getting good grades. So families that can afford
to save money in advance of college costs should consider investing
in both types of 529 plans.
But for those families who don't have a lot of discretionary
income, investing in a prepaid plan is much better than doing nothing
at all. They offer some peace of mind that, at the very least, the
tuition portion of college costs is taken care of. Now that the
playing field between the two different 529 plans is pretty even
from a financial-aid-eligibility standpoint, prepaid plans are more
compelling than ever.
Characteristics of prepaid
plans
In his book, "The Best Way to Save for College: A Complete
Guide to 529 Plans," Hurley describes three types of prepaid
programs. The most popular is the "contract" program where,
as a resident of a state, you purchase in advance a certain amount
of tuition credits that can be used at any public college or university
within the state. You can make a lump-sum payment or a series of
payments over a period of time, typically five years.
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