Johns Hopkins University recently agreed to participate in a prepaid tuition savings plan called the Independent 529 plan, designed for parents currently saving money for their child's higher education.
Under the plan, parents prepay college costs while the colleges carry the risk and protect the investments from future tuition increases -- i.e. the tuition purchased now is guaranteed to meet the costs when the child matriculates into a college.
"The Independent 529 plan serves as a hedge against inflation; the value of your investment grows at the same rate of tuition increases. Tax laws have changed to make this attractive. This type of savings plan was not tax free back in the 1990s. But in the Spring, Congress passed legislation to make the investment tax-free -- this is what we at Hopkins were waiting for before participating ourselves," Ellen Frishberg, director of student financial services, explained.
"Also we did not participate initially because before becoming tax-free the plan actually hurt needy students. Savings earned from the plan were actually deducted from a student's financial need. Now, however, the savings from the prepaid plan count as a parent assent and not a reduction in need," she continued.
Frishberg highlighted that there is some risk involved for the university in participating with plan, for example if tuition were to grow faster than the rate of return on the investment. Currently the Independent 529 plan counts 4,700 colleges among its constituents and $92 million in available assets with several more colleges predicted to sign up.
