We hear a lot about 529 Plans—a way to contribute to your children’s college education while receiving some state tax deductions. I think 529 Plans are great in that you can save up for college education while getting some tax perks. If you live in a state that allows you to take state tax deductions on 529 contributions, you can reduce around 5+% of the contributed amount towards taxes. Not bad. If you live in a state without income tax, you can still benefit by contributing to 529s by having the growth tax-free. If the stock market goes on a tear for a whole decade before Junior goes to Harvard, you can really come out ahead by not paying taxes for the investment growth:
In this example, a $1000 monthly contribution for a decade will get you $120,000 in principal and roughly $189,000 after investment gains. You basically “gain” $69,000 tax-free.
What if you want to do better?
Come the Private College 529 Plan.
The Private College 529 Plan is a privately run investment vehicle in which you essentially prepay your child’s college tuition in today’s money as a credit for future tuition. Think of it like a points system that we see in credit cards. It is an interesting concept since private college tuition inflates at an insane rate. For instance, tuition at my college is now three times higher than what it was when I attended. I can tell you now physician salaries aren’t three times higher now compared to back then either (in some specialties it’s actually lower!). Shocking.
I presume that this sort of system works by investing your contribution in a black-box system sort of how those life insurance investment vehicles work (cough::whole life insurance). This isn’t a bad idea in this case. The burden of growing your money is placed on this investment group, and it is honored by the university that your kid ends up attending. The catch is that your kids has to get into a participating college.
What if my kid needs to attend an Ivy league school?
Smart Money MD is a big fan of going big.
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Fortunately there are some top-tier colleges in this program. A complete list is here, but I’ve taken the liberty of listing schools that Tiger moms would typically approve of:
- Johns Hopkins
- U of Chicago
- Rhodes College (maybe)
My apologies if your favorite alma mater is actually on the Private 529 Participating college list but wasn’t listed above. What’s more critical is that Princeton is the only Ivy League school currently participating in this program. If Junior’s parents and grandparents are Legacy Yalies, this program won’t cover her tuition (yet)!
Realistically the number of participating private colleges is exhaustive. Based on what I’ve seen, most private colleges that kids would be most likely attending are on here. I suspect that today’s tuition of approximately $45k annually will likely balloon up to $90k+ in another decade. You’d have to be making pretty darn good investments to double your investments tax-free in a decade.
What if my kid doesn’t get into any of these colleges?
This might happen. Or they end up getting into a solid public university on a scholarship. You can still transfer the funds/credits over to another kid’s account. If you decide to withdraw the money, you will end up paying tax on any gains that have accumulated (capped at 2%) plus another 10%. I suppose that the penalties are somewhat onerous but not unexpected given the potential gain.
Overall, I don’t think that this is a bad investment if the criteria fits your children’s educational goals. It’s just tough to predict how their educational trajectory will progress years ahead of time. I also assume that the usefulness of the private 529 plan also depends if the program will still exist by the time your child goes to college too (just like Social Security).
Do you plan to use the Private 529 Plan?