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Private colleges to offer new way to save for tuition

©Associated Press

February 16, 2003

PHILADELPHIA -- Stanford, Georgetown and other private colleges have joined together to give parents another way to prepay for discounted tuition.

The IRS this month approved a new type of 529 tuition savings plan, to be run by the nation's private colleges themselves.

"We want to encourage parents to save for college, so they can afford places like Juniata," said Tom Kepple, president of Juniata College, a small liberal arts school in central Pennsylvania where tuition is now about $22,000.

Independent 529 Plan organizers expect about 300 schools to sign on when their program gets under way this summer, and they say that number should double over time. Families who enroll buy future tuition credits at current prices, at a discount of at least one-half percent.

State-sponsored 529 education savings plans have been popular since they allow families to save tax-free, and they usually move into more conservative investments as the child gets older.

But the families who have poured more than $9-billion into these plans have seen their holdings shrink. Some of the state-run plans have tacked on fees due to rising tuition rates and falling stock market values.

The nonprofit consortium, which will hire a private firm to run the program, will realize any gains or losses from the investments.

"The colleges (are) taking the risk. They can afford to have it smooth out over time, while a family only has one or two shots at (the stock market)," said Nancy Van Devender, vice president of the consortium in Albuquerque, N.M.

Already, 292 schools have paid $10,000 or more to fund the five-year lobbying effort. They include several Ivy League schools, and others from large research universities to small liberal arts schools.

All 50 states already offer 529 savings plans or tax-exempt prepaid tuition plans for public colleges, or both.

Congress approved the new Independent 529 plan in the 2001 omnibus tax bill, conditional on IRS approval.

Juniata hopes to offer as much as a 3 percent discount. If an investor puts $11,000 into the plan this year, the discount, when compounded, should equal a year's tuition at Juniata in 18 years, Kepple said.

The money might buy 1.2 years worth of tuition at a cheaper school in the consortium or 0.8 percent at a more expensive school, or at a school that offered a smaller discount, he said.

Investors will be able to put in up to five times the tuition of the most expensive school, a total now estimated at about $140,000.

As with some other 529 plans, the principal can be transferred to another family member if the beneficiary doesn't attend a member school. If the child decides on a public college, the plan returns the principal, plus or minus 2 percent, depending on the fund's performance. There are steeper penalties if the money is withdrawn for unauthorized purposes.

Joseph Hurley, a financial planner who has written a book on 529 plans, said the newest one might attract people who want their children to go to their alma mater or a similar school.

But, he says, "The hesitation might be that all prepaid programs, including this one, are not treated very well for financial aid purposes. They reduce your eligibility for federal financial aid on a dollar-for-dollar basis."

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