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Banking on college acceptance

Kai Ryssdal Mar 25, 2013

You know how loyal people can be about their alma maters, right? College days, carefree life, and all that. Some people love it so much they do everything they can to get their kids and grandkids into the same schools — up to and including pre-paying for tuition through a private college 529 plan.

One person’s loyalty, though, is another person’s insanity. What do you do if your kid doesn’t get in, or doesn’t want to? New York Times reporter Ann Carrns has been working on that story.

“[The private college 529 plan] lets families prepay future tuition at today’s rates at a couple of hundred private, four-year schools,” says Carrns. “It includes some big-name schools like Stanford and MIT.”

So how does it work?

“Most 529 savings plans that people are familiar with use a traditional savings and investment model. You would put money in, invest it in a menu of mutual funds, and then you use the money tax free, when it’s time for your child to go to college. But with the private plan, your money buys a certificate for the appropriate proportion of the tuition, and the schools honor the certificates when your child goes to school,” says Carrns. “So the earlier you start, the more savings you lock in.”

Saving for college is a very emotional issue for families. The money parents stash away for their kids embodies the hopes and dreams they have for their future. And for parents participating in these private college 529 plans, there is an added element of limiting the choices their kids may have when it comes to deciding where to go to school.

“Many parents in these private plans attended one of the member schools. So there may be a nostalgic wish to create a tradition or have their child go to their alma mater,” says Carrns. “The main catch, of course, is if you start when your child is young, to maximize your savings, you have no idea what type of student your child will be or what type of school they might like. But your child has to be admitted to one of the member schools to benefit. Participating doesn’t give you any extra points from the admissions office.”

Mind Games &Money Browse other stories in our collaboration with the New York Times. Plus, take our quiz to see how much emotions impact your personal finances, see the 15 happiest and saddest U.S. cities based on tweets, watch a video explainer about “goodwill,” and learn lots of good facts about money and emotions. Explore now.

What happens if the child doesn’t get admitted into a member school?

“You have two options,” says Carrns. “The plan allows the parent or whoever has opened the account to change the beneficiary. So another child could use it or even a relative could use it.”

“The other option, is you can request a refund,” she explains. “The drawback there is that under the plan’s rules, you’ll get your money back, but earnings of no more than 2 percent. So perhaps you could’ve made more money if you invested in a more market-based plan.” But, she says,  “You are also protected. You won’t lose more than 2 percent.”

Carrns says after you put money into the plan, you can’t use the certificate for at least three years. So for parents or caretakers who don’t feel comfortable participating when the child is young and the future is uncertain, you can still put money into the plan when your kid is in high school. Even if you wait until his senior year to invest, the money will be still available to help pay for his last year of college.

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