It sounds like a great deal: an investment that generates guaranteed, tax-free returns that are likely to be well above the inflation rate.
This is the arrangement offered by Tuition Plan Consortium. The St. Louis, Mo., organization sponsors the Private College 529 Plan, a prepaid tuition plan for private colleges and universities.
Despite the plan's advantages, it has less than $200 million in assets. The eight-year-old consortium plans to boost inflows by expanding beyond its direct-sold model to target the adviser channel as well, Nancy Farmer, its president, said in an interview this month.
The Private College 529 Plan lets families invest for their children's education by prepaying tuition at any of 270 member institutions. This means a plan beneficiary can attend college many years from now at today's tuition rate. Since college tuition is notorious for rising faster than the general inflation rate, contributing to the plan is, in effect, an investment.
What is the pace of college tuition inflation? In the past decade, tuition and fees at four-year private colleges and universities have averaged 3% annual increases — and that's on top of regular inflation.
Yet against that backdrop, the Private College 529 Plan has a relatively small asset base.
"We're fairly small because we've been a direct-sold plan," said Farmer. "A priority going forward is to get into the adviser channel."
Indeed, Tuition Plan Consortium in August named the OppenheimerFunds Inc. unit OFI Private Investments to manage the Private College 529 Plan, replacing TIAA-CREF.
The move was made with the intention of gaining distribution, through Oppenheimer, to the adviser market, said Joe Paul Case, the dean of financial aid at Amherst College, in Massachusetts, and a board member of Tuition Plan Consortium.
"In the past, we've relied on direct mail and passive marketing: 'Here's a Web site to go to and learn about it,' " said Case. "We moved to Oppenheimer in part to try a different vehicle so that investment advisers have this as part of their portfolio of things to talk about with clients."
Tuition Plan Consortium hopes to be actively distributing through advisers by early next year, Farmer said. "What we are going to be doing over the rest of this year is reaching out and making advisers aware of this plan," she said.
The consortium's 529 plan is not the sort with which many college savers are familiar. Families that participate in the plan do not pick investments and do not need to keep track of whether they rise or fall. Instead, they buy tuition certificates that maintain their buying power for as long as 30 years.
In other words, a semester of undergraduate tuition in a participating college or university, purchased today, would still be worth a semester of education at that school for up to 30 years, regardless of inflation in the meantime.
In the case of the Private College 529 Plan, consortium members take the investment risk. The tuition payments are invested on their behalf, and the returns may or may not keep up with tuition inflation.
The member schools also bear all of the plan's operating costs; all the contributors' money goes toward tuition expenses.
Schools that invest in 529 plans do have an advantage over individual beneficiaries who invest in the retail plans, noted Farmer. "As a parent, you have a hard stop when your kid enrolls in college," she said. "Schools have a long [investment] horizon."
However, the market meltdown has adversely affected some consortium members. Amherst, for instance, has had to make up some market losses as students have redeemed their tuition certificates, said Case.
"In the last couple of years, we've spent some chunks of our own money to hold families harmless," he said. "We've been filling some holes, and that's part of the deal."
Families can start accounts with as little as $25, or any amount in between that and the plan's contribution limit of $215,950. Participants do not have to commit themselves to a school until they redeem the tuition certificates.
What happens to the tuition certificates if the Tuition Plan Consortium should disappear tomorrow? "The schools are on the hook," said Farmer. "Our legal agreements require the schools to honor that tuition until it's all been used."
One drawback of the Private College 529 Plan is that its tuition certificates cannot be used for expenses such as room and board, books or computers.
