ASK KIM
Downside to Independent 529s
by Kimberly Lankford

My son was born in December, and I'm considering a prepaid tuition plan that includes Notre Dame. But I understand that if he does not go there, the amount refunded to me will include a mere 2% annual return. Is this a bad deal?

The Independent 529 plan lets you pay tomorrow's tuition (or part of it) at today's prices for more than 240 private colleges, including many big names such as Notre Dame, Princeton, Emory, the University of Chicago, Stanford, Amherst, Tulane, Wake Forest and Wellesley. The number of participating schools continues to increase. For a full list, see the Independent 529 Plan Web site.

The value of your contribution depends on the current cost of each college. If you contribute $10,000 now, for example, you'll get a tuition certificate that covers one year of full tuition at a college that currently costs $10,000 annually, or one-third of one year's tuition bill at a school that currently costs $30,000. As an added bonus, all of the schools are offering tuition discounts of at least 0.5% for Independent 529 plan participants.

Prepaying college costs can be valuable considering that the average tuition and fees at four-year private colleges increased by 6% in the past year, according to the College Board. The Independent 529 money is tax-free if used to pay college bills, and you're guaranteed to have a set portion of the tuition bill paid off no matter what happens to the cost of college or the stock market in the future.

But you're right about the downside. If you don't use the money at one of the participating schools (if your son ends up going to Harvard, Yale, Duke, Johns Hopkins, Northwestern University or a state college, for example), then the account will be worth only the original investment plus returns of up to 2% per year. You could roll your Independent 529 plan money over into a regular 529 account at any time, but your returns until that point will also be limited to the 2% per year. Or you could switch the beneficiary to another family member who may attend a participating school.

If you worry that your child won't end up at one of the schools on the list, then you might be better off investing in a traditional 529 state college savings plan. Your return will depend on the plan's mutual fund investments, and the money can be used at any college, public or private. See our 529 map for more information about your options and our favorites.