The Independent 529 Plan, a new prepaid college tuition plan managed by TIAA-CREF and run by a consortium of more than 220 private colleges, launched last month. The program, which has been in the works for five years, will market itself primarily as a direct-sold product, but also wants to attract fee-based advisers.
TIAA-CREF said the plan has already drawn a lot of interest from the CPA community, and the group will participate in a couple of financial planning conferences in Las Vegas this fall and next spring in order to draw planner interest.
"It would help to have intermediaries," said Doug Brown, president and CEO of Tuition Plan Consortium, the Albuquerque, N.M.-based not-for-profit group that will oversee the plan. "But it would not be appropriate to engage commission-based brokers," he said.
Enrolling families won't be charged any consumer fees to join, transfer or withdraw from the plan, and the group said it wants to emphasize its low cost for now. Investment returns on the plan will be capped at the rate of tuition inflation on the participating colleges, but families get discounts on the going tuition rates of those colleges. At a minimum, institutions must offer at least a one-half percent discount per year on their current tuition costs. The tuition and discount rates will be reset on July 1 each year and these numbers will be available to the public. While monthly payments can be as low as $25, families are required to invest a minimum of $500 within two years.
If the student for whom the family is saving either fails to get into any of the participating colleges, or decides to go to a college outside of the program, the 529 can be used for another family member. Otherwise, the investor gets a refund of his investment, adjusted for investment performance, with a maximum return or loss of 2%. There is a three-year minimum holding time before a certificate can be used.
Advisers see advantages and disadvantages to the program. Unlike state universities and colleges, private college tuition is not set by state legislatures. This gives private schools the leeway to bend tuition rates to match investment performance, said Raymond Loewe, an adviser who is both fee and commission based and the founder of College Money, a college savings consultant site for planners. That's a great advantage at a time when many state prepaid 529 plans are in dire financial straits because of soaring tuition rates and miserable market performance. The program also provides a better selection of colleges, Loewe said. Many state 529 programs make it difficult or costly for participants to use the funds for an out-of-state university.
On the other hand, because it is a prepaid plan, the return is limited to tuition inflation. Another drawback is that investors in the independent plan won't get the state tax advantages that come with many of the state 529 plans. Meanwhile, for those that are already invested in a 529 plan, the plan administrators might charge penalties and fees, and ask for a refund of any tax advantages, should an investor opt to roll over those funds into the Independent 529 Plan.
Chris Hunter, the spokesman for the College Savings Plan Network, said he did not think the Independent 529 consortium would drain the coffers of current state prepaid and savings 529 plans. The average account size in a state prepaid program nationwide was $5,780 as of the end of June, while the average size for a state savings plan was $6,940. "I think that goes a lot farther at a state school than it would at one of those private universities," Hunter said. "So, I don't know if you would see a dramatic shift or rollover of accounts. It certainly might make someone who expected his or her kid to go to a private college to think twice about enrolling in a state 529, however," he said.
So far, 8,000 families have signed up to get information about the program on the consortium's Web site, Brown said. The consortium hopes to amass $70 million in investments by the end of this year, and hit the billion-dollar mark by the end of its fourth year of operation. Currently more than 220 colleges, including Princeton, Amherst, Tulane University and Smith College, have signed on, and the group expects that number to grow to 300 by the end of next year.
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