529 college savings plans are named after the 1996 Internal
Revenue Code section that confers tax exemption to "qualified
State tuition programs" (Hurley, 2002, pp. 12-13). There
are two basic types of 529 programs - prepaid tuition plans
and college savings plans.
a prepaid tuition program, families may purchase future college
tuition years or units, generally at that state's eligible
colleges or universities (or an equal amount toward private
or out-of-state tuitions), at current rates. College savings
plans allow families to establish, and contribute to, a special
savings or investment account dedicated to a student's future
higher education expenses at any accredited postsecondary
institution. The account is similar to a mutual fund account
in that the contributor chooses investments or an investment
strategy, usually stocks and bonds in varying proportions
depending on the age of the beneficiary and the contributor's
tolerance for investment risk.
ideas behind these plans are not new. The first prepaid tuition
plan was introduced in Michigan in the late 1980s (Ma &
Fore, 2002, p. 24; Hurly, 2002, p. 12). Today, each of the
fifty states, and the District of Columbia, offer at least
one plan (either prepaid or savings), and many offer more
than one. Initially, there were problems determining the tax
status of accounts. The addition of Section 529 to the Internal
Revenue Code in 1996, and changes made to that section since
then, have clarified and enhanced the tax benefits of these
most appealing benefit, for many families, is the tax savings.
As of January 1, 2002, the earnings on these accounts are
exempt from federal taxes, provided the money is used for
educational expenses. (This exemption will expire on December
31, 2010 unless renewed by Congress. See Ma & Fore, 2002,
p. 25) Although state tax laws vary, many provide for tax
deductions or exemptions of contributions and/or earnings.
benefit of the plans is their flexibility. Anyone can open
or contribute to a 529 plan. Most savings plans do not restrict
eligible individuals to their state residents, so families
can compare plans from many states to find the one best suited
to their needs. Withdrawals from the plans can be used for
much more than just tuition - they can pay for fees, room
and board, books, supplies, and equipment. Also, the plans
can be transferred to another member of the initial beneficiary's
are complications, however.
savings plans have investment risk. The value of a college
savings plan depends on the performance of the investment
or investment package chosen by the contributor, and, as with
any investments, the plan can actually decrease in value at
times (Investment Company Institute, 2002, p. 5). With prepaid
tuition plans, the assumptions on which many programs were
established proved to be faulty. The plan administrators assumed
that the money collected from account holders and invested
would rise in value more quickly than tuition rates. Lately,
however, many colleges have been increasing tuition rates
rapidly (mainly as a result of decreased state support in
a weak economy), and the plans' returns on investments have
decreased, and in some cases, the plans have even lost money
(Investment Company Institute, 2002, p. 5). Recently, several
states, including Kentucky, Texas, and West Virginia, have
temporarily stopped accepting new applications for their prepaid
tuition plans. Colorado has closed its plan permanently to
new applications, and officials in other states are considering
possible action (Schmidt, 2003).
additional complication is the impact of the funds from these
savings plans on students' eligibility for need-based financial
aid. Savings plans funds are included as family assets in
calculating aid eligibility, and thereby may decrease the
amount of aid students can expect (Ma & Fore, 2002, p.
these complications, interest and investment in Section 529
college savings plans is growing - from just over 1 million
accounts in 1999 to over 5 million, containing more than $35
billion and with an average value of $6,753 per account, in
2003 (College Board, Trends in Student Aid 2003, p. 4, p.
17). A new prepaid tuition plan, the Independent 529 plan,
was opened in September 2003. Similar to a state's prepaid
tuition plan, this plan will allow families to prepay tuition
at any one of the more than 220 private colleges or universities
that are participating. This plan hopes to avoid the complications
other prepaid tuition plans are encountering by having the
participating colleges assume the risk that if tuition increases
outpace investment returns, they will not receive full payment.
This new model may enable this prepaid tuition plan to survive
even in this era of steep tuition increases and small investment
returns (Schmidt, 2003).
affiliate of the National Association of State Treasurers
serves as a clearinghouse for information among existing college
savings programs. The site includes a Guide toUnderstanding
529 Plans and a state-by-state overview. http://www.collegesavings.org
excellent site includes basic information on 529 savings plans;
descriptions, linksto, and evaluations of all the state 529
plans; a college savings calculator; and information on finding
a 529 consultant. http://www.savingforcollege.com/
is the website of the Independent 529 Plan, the plan that
allows families to prepay tuition at one of the more than
220 participating independent institutions. http://www.independent529plan.com/
Entrance Examination Board (2003). Trends in College Pricing
2003. Retrieved November 17, 2003 from the College Board website:
Entrance Examination Board (2003). Trends in Student Aid 2003.
Retrieved November 17, 2003 from the College Board website:
J. (2003, February 10). IRS Approves New Tax-Exempt Prepaid-Tuition
Plan for Private Colleges [Electronic Version]. The Chronicle
of Higher Education, Daily News.
J.F. (2002). The Best Way to Save for College: A Complete
Guide to 529 Plans. Pittsford, NY: BonaCom Publications.
Company Institute. (2002). A Guide to Understanding 529 Plans.
Retrieved October 28, 2003 from the Investment Company Institute
http://www.ici.org/pdf/bro_529_plans.pdf through the College
Savings Plans Network website: http://www.collegesavings.org
J. & Fore, D. (2002). Comparing 529 Plans with Other College
Savings Options. NASFAA's Student Aid Transcript 13(4): 24-34.
P. (2003, September 12). Prepaid-Tuition Plans Feel the Pinch
[Electronic Version]. The Chronicle of Higher Education, p.