Tomorrow's Tuition, Yesterday's Prices

Dickinson's I-529 Plan features an unprecedented discount rate

by Bill Sulon

September 23, 2008

With Dickinson College's new I-529 plan, eight-month-old Ryan Smith of Mechanicsburg could attend college in 18 years at a lower price than today's tuition prices.

Most parents are delighted by the thought of their children attending college, but many worry that they won't be able to afford it when the time comes. Tuition increases every year, with no end in sight.

Now there's a financial solution that can help: The Independent 529 plan, the only national prepaid tuition plan for private colleges and universities, including Dickinson.

Established in 2003, the I-529 plan allows participants to lock in future tuition at less than today's price. Most of the more than 270 participating colleges offer discounts from today's tuition of 0.5 percent to 2 percent. Because the most selective schools are the most popular with applicants, they generally offer the lowest discount rate above inflation simply because their market demand allows a lower discount price.

This year, however, Dickinson—which previously had been offering a 1-percent discount on tuition—is turning the notion of setting low discount rates on its head by offering an unprecedented rate of 4 percent. As a result, families would achieve annual "returns" on their invested dollars totaling 4 percent plus the rate of future tuition increases. Assuming tuition continues to increase 6 percent per year, the additional 4 percent means that families would be guaranteed an annual return of approximately 10 percent. (By comparison, annual returns range from 6.5 percent to 8 percent for colleges and universities offering discount rates of 0.5 to 2 percent.) Additionally, the 4-percent discount compounds annually, making the return even greater over time. (The annual return may be different if the tuition inflation rate varies from year to year.)

No Risk to Families

With an I-529, the participating colleges and universities—not families—assume the risks associated with investments and tuition inflation. The I-529 plan is free from federal taxes and, unlike other 529 plans, there are no fees for participation.

The plan works by allowing families to buy tuition certificates today to pay future tuition bills. A family can pre-purchase full or partial tuition, and the amount of tuition purchased is guaranteed when the certificates are redeemed. The redeemable value of the I-529 plan tuition certificate doesn't depend on the performance of the stock or bond markets. The funds are invested through TIAA-CREF, the largest educational pension investment firm in the United States. Owners of the I-529 accounts get the guarantee of prepaid tuition regardless of how the investments perform.

That's why Jeff and Margie Murawski of Turnersville, N.J., jumped at the opportunity to enroll in the I-529 prepaid tuition plan for their daughter Allison, a first-year student. And by doing so they will help pay for a portion of Allison's senior-year tuition at Dickinson in 2012—when the price will inevitably be higher—at a 4-percent discount from current-day tuition prices. (There is a three-year vesting period before participants can use the money for tuition.)

"As a parent of a first-year student, I like the fact that Allison's last year of school will cost less than the price of tuition this year," said Murawski, a heating, ventilation and air-conditioning mechanic.

Mutual Benefits

Participation in any 529 plan, independent or otherwise, benefits families and colleges, said Bob Massa, Dickinson's vice president for enrollment and college relations. He hopes other colleges in the I-529 plan will follow Dickinson's lead and increase their discount rates.

"Dickinson set a higher discount rate from the current price not to compete against other colleges for buyers of our certificates, but to call attention to the need for parents to save for college," Massa said.

Boosting financial incentives—in the form of bigger discounts—protects families and is good for colleges, Massa said. By offering more financial incentive to save for education, colleges provide families with more choice about where their children can attend. Some colleges are unable to provide significant financial aid and either will not admit a student who needs a lot of aid or will provide an insufficient amount of aid.

Families concerned that saving for college will lessen their ability to receive financial aid are helped by the Pension Protection Act of 2006. Under the act, 529 plans are viewed as an asset of the account owner, which generally means a financial-aid officer can count a maximum of only 5.6 percent of the account balance when assessing a student's financial-aid eligibility.

Families with I-529 plans are under no obligation to enroll their children in a specific college. If the student chooses to attend another private college in the plan, the family will receive the discount rate offered by that member college at the time the investment was made. If the student chooses to go to a college outside the growing list of I-529 colleges, the money can be transferred to a different 529 plan, such as a state-sponsored saving plan.

Alan Silver, a certified public accountant who invested in the I-529 plan to help pay for his daughter's education at Dickinson, said the college's commitment to kick in a return of four percentage points above the annual tuition inflation rate makes an attractive plan even more appealing, especially in a volatile economy.

A "substantially better" plan

"I took advantage of what was there, but it's gotten substantially better," Silver said. "It certainly makes it far more powerful."

In keeping with the diverse financial needs of families, all I-529 plans offer a number of ways to participate, from prepaying the full cost of several years to paying a set amount—as little as $25—each month. The more and earlier you prepay, the greater the percentage of future tuition cost you can lock in at less than today's price. The Dickinson plan, however, has the added bonus of the 4 percent discount rate, which compounds each year leading up to the date the prepaid tuition is redeemed at a participating institution.

"The families that I have spoken with are very pleased that the college is offering such a large discount through the I-529 plan," said David Walker, associate vice president and associate treasurer at Dickinson. "Our current discount rate offers families significant dollars in additional savings, and parents have commented that more colleges should follow our lead. Parents also appreciate that the college has taken a national leadership role in addressing the issue of college affordability."

Walker said one parent wondered why most colleges were offering only 0.5-percent discount rates and questioned whether they were serious about participating in the I-529 plan.

"He also recognized how significant a compounding discount rate of 4 percent was in dollars and cents," Walker said.