TIAA-CREF & 257 Independent Colleges Offer Prepaid Tuition Plan
By Emily Sherwood, Ph.D.
There’s hardly a family in America who hasn’t gasped at the rates colleges are charging for tuition these days. Yet what many people don’t know is that TIAA-CREF, a financial services company in the business of providing pension retirement benefits, offers a program that allows families to prepay their child’s private college tuition at today’s prices and redeem it when the child is ready to attend college. Sound easy? TIAA-CREF’s Richard Calvario will be the first to tell you that this three-year-old program, launched in September 2003 and now including 257 private colleges who call themselves the Tuition Plan Consortium (Princeton, Stanford, MIT, Notre Dame, and the University of Chicago are on the list), makes good financial sense.
“This prepaid plan, known as the Independent 529 Plan, transfers the risk of tuition inflation from the family that’s trying to save for college to someone else (the college),” explains Calvario. Calvario is quick to back up his assumption with the math: Historically, tuition inflation for private schools has been in the neighborhood of six percent per year over the past decade. Also, every participating school is required to discount its tuition at a minimum of .5 percent per year (the average discount is one percent.) Thus, by prepaying tuition, a family would earn approximately seven percent annually on their money – tax-free. If the child selects a college that is not in the Tuition Plan Consortium, the family can choose to either take a refund or change the beneficiary to another relative.
In addition to the potential financial benefits for families, the Independent 529 Plan is “a win-win proposition for colleges,” adds Calvario.
First off, it’s good public policy. Shortly after the Program launched in 2003, Congress passed a resolution congratulating participating colleges for making education more affordable, and this makes them look good in the eyes of the public. Secondly, the program creates a pool of families who are potentially financially ready to send their children to college, no small feat in today’s economically challenged times. (Some 60 percent of all college students receive some form of financial aid, and most of that is in the form of loans. Thus, students are leaving college with “tons of debt,” according to Calvario.) Yet a third benefit to colleges is that they now have access to a pool of families for recruitment purposes, a competitive edge to be sure. And finally, sometimes the college actually receives more than the sticker price of tuition when the certificate is redeemed, if TIAA-CREF’s investments have yielded a rate of return that is better than the rate of tuition inflation. “Colleges fully expect us to perform better than inflation over the long term, which is why the program mandates a discount,” adds Calvario.
Currently the number of students participating in the Independent 529 Plan is smaller than Calvario would like, around 4800 accounts. However, he adds, “We’re still in the early stages. We’re a new, unique program. We’re still trying to build a brand, to tell people who we are.” And on the college side, “twelve to fifteen schools are joining every year. We just added Johns Hopkins. Schools are gradually becoming convinced that this is a good thing,” he continues. While both new and potentially confusing for families, the best advice is for interested parents is to educate themselves on their options by logging on to websites such as www.independent529plan.org or www.savingforcollege.com.#
