Hopkins joins prepaid plan

Personal Finance

September 05, 2006|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

The Independent 529 Plan is three years old this week, and the prepaid tuition plan for private colleges has reason to celebrate.

The treatment of prepaid plans under the federal financial aid formula became more attractive earlier this year. The federal pension law passed last month guaranteed the plan's very existence and made tax-free withdrawals permanent. (Tax provisions that allowed the plan to be created and permitted tax-free withdrawals for college expenses were set to expire in 2011.)

And the icing on the birthday cake: The Johns Hopkins University is a new member.

"The permanency [of the plan] was a big thing for us," says Nancy Farmer, chief executive of the plan. "We had this cloud hanging over us."

Tuition certificate

Independent 529 allows families to buy a tuition certificate that can be used at any of the participating 257 private colleges and universities.

Here's how it works: Say a family contributes $5,000 this year. The student years later ends up attending a college whose tuition is $10,000 in 2006. The family will receive a certificate worth a half-year's tuition at the college no matter the cost when the student enrolls.

The savings can be even greater because schools in the program are required to give a minimum discount. The more years the family is in the plan, the more the discount is worth.

Students aren't promised entry into a private college by signing up for the plan. Contingencies exist if they don't get in. The certificate can be transferred to another relative if the child doesn't go to college. Money can be rolled over into another savings plan if the student goes to a public college. Refunds are available, too.

So far, Independent 529 has 4,700 accounts with $92 million in assets. That's not a lot. But now that some of the uncertainties over the plan's future and taxes have disappeared, more accounts will be opened and more schools will join, Farmer predicts.

Hopkins initially didn't sign up partly because of the adverse financial aid treatment. Prepaid plans used to reduce need-based federal aid dollar-for-dollar.

"You hate to make a recommendation for something that could hurt families who are very needy," says Ellen Frishberg, Hopkins' director of student financial services.

Less impact on aid

After a change in federal law, prepaid plans are now considered the asset of the account owner, which can be the student, parent or other relative. This has less of an impact on aid, and is the same way 529 college savings plans are treated under the federal aid formula.

Financial aid expert Mark Kantrowitz says the Independent 529 plan is suited for families who intend to send their children to private colleges and want peace of mind.

Financially, though, parents might get a better deal out of a state prepaid plan that allows them to lock in the rates at public colleges, Kantrowitz says. That's because tuition inflation rises faster at public schools, he says.

Families wanting more information on the 529 plan for attending a private college can log on to www.independent529plan.org.

Price reduces fee

T. Rowe Price Associates is giving a break to those who give. The Baltimore investment company last week cut the annual administrative fees on its donor-advised fund.

People donate cash and securities to donor-advised funds and get an upfront charitable tax deduction. They no longer control the money after that. But they can recommend where the money is donated and the size of the gift.

Price's fee cuts, though, apply only to the biggest accounts of $500,000 and up. For instance, the annual fee on balances of $1 million to $2.5 million has been cut by more than half to 0.18 percent.

Ann Boyce, president of the T. Rowe Price Program for Charitable Giving, says lower fees might attract bigger accounts to the fund. Even though the fund money no longer belongs to donors, they realize that low fees mean more money is left to give away to charity, she says.

Questions? Comments? Write personal.finance@baltsun.com.

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