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Private Sector: Some Private Colleges Say, 'Pay for Future Costs Now at Tuition Rates from the Past'

The College Board's annual report on tuition trends over the last 10 years was enough to give the parents of a future college student palpitations. What could be more upsetting than learning that tuition has nearly doubled in the past decade at four-year public institutions, and risen 42 percent at private colleges and universities?

In the not-so-distant past, state-sponsored prepaid tuition plans were seen as the savvy investor's solution to rising tuition costs. These plans allow parents to buy future tuition "credits" at today's prices. Say a parent purchased a year's tuition at a state school at the 1995 rate of $8,000. Even if tuition doubles by the time the child goes off to college in 2005, the parent pays the 1995 rate.

But these plans aren't immune to economic realities. Since the stock market took a nose dive and tuition has increased faster than investment earnings, many of these state-sponsored funds have reported massive deficits. That means a parent's initial investment might not cover the projected tuition when first semester payment comes due.

Each college sets its own discount. For example, a grandparent can buy future tuition for a newborn at Juniata College at the same price students paid in 1995. So for that child, tuition at Juniata will be lower than the college's current level.

The good news is that 230 private colleges and universities (including 21 in Pennsylvania) jumped into the fray last fall with their own version of a prepaid tuition plan called the Independent 529. Investors purchase certificates that can be used to pay future tuition costs at any of the private colleges and universities that are members -- from Ivies (Princeton) to research institutions (Carnegie Mellon, Syracuse) to smaller liberal arts colleges (Juniata, Sewanee, Rhodes, Furman). When the student is later accepted at a member college, the certificate can be used to pay the percentage of tuition the investor pre-purchased.

Like the state-sponsored plans, Independent 529 funds are tax-exempt for investors and allow investors to buy a "piece" of tuition at less than today's price. Yet there's a vital difference: All funds are backed and guaranteed by member institutions, so rising tuition costs and stock market fluctuations won't diminish the investment's value over time. Even better, contributors get an annual discount of at least a half-percent off the current year's tuition.

Each college sets its own discount. For example, a grandparent can buy future tuition for a newborn at Juniata College at the same price students paid in 1995. So for that child, tuition at Juniata will be lower than the college's current level. (Some discounts are lower and some higher than Juniata's.)

Unlike state-backed prepaid plans, which are designed to be used at schools within the sponsoring state, the Independent 529 is a national program for use at any member institution.

When a contributor opens a plan, he or she selects five "favorite" institutions. Each month a statement shows how much tuition has accrued at each of those schools. But the beneficiary is not locked into those choices -- he or she can transfer the funds to any member institutions. The plan already includes most of the best schools in the country, and there's a high probability many more colleges will join over time.

The plan's flexibility also allows funds to be transferred to other family members, or to be rolled over into state-sponsored 529s if the beneficiary decides not to attend a member of the private consortium.

To be sure, no prepaid tuition plan is risk free. If a child decides, for instance, to forgo college, the funds are subjected to a 10 percent penalty and taxation on any gains -- the same penalty that applies to state-sponsored plans. Also, a sunset provision in the current tax law calls for the tax-free features of all 529 plans to disappear in 2011 (although many pundits expect Congress to extend that law before then).

Yet this is one of the more durable financial strategies parents can pull off the shelf when they're looking 18 years down the road and realizing their child's four-year college education could cost upwards of $200,000. And it places the bulk of risk on the schools, which both guarantee the plan and set future tuition rates. Yes, the colleges get a chance to invest the money for a potentially high return, but if the market sags or tuition spikes upward, the investor still gets exactly what he paid for.

Tom Kepple has been president of Juniata College since 1998. He is a native of Murrysville, Pa.