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Unlocking access: behind the scenes of one institution's decision to join Independent 529 plan.

Joining Independent 529 Plan, the only 529 plan organized and run by and for independent colleges and universities, is a significant and complex decision because of the financial and operational ramifications. Participating institutions assume the investment risk by locking in tuition payment at a discount from the rates in effect when deposits are made, and the colleges assume all administrative fees. Given these current and future financial obligations, why did we at Mount Holyoke College (Mass.) consider the plan at all?

The answer, in a word, is "access." Anything that independent colleges and universities can do to help enable more parents and students consider them as an option, and be able to afford private higher ed, creates a win-win situation for both families and colleges. Independent 529 Plan helps parents, grandparents, and others save for their Children's higher education, and thereby encourages them to do so.

The benefit to participating colleges is that it relieves some of the pressure on the institutions to provide financial aid. Many independent colleges are tuition dependent, cases for 80 percent to 90 percent, or more, of their annual budgets. If they can offer parents a way to save-tax--free--for college, the benefits to the institution are obvious.

Joining Independent 529 Plan wasn't a choice we made lightly. The school considered the potential benefits to parents and others, within and outside the college community, who are concerned with children's college education. It was an overall belief in the importance of the public policy issues involved, and a concern that private higher education continue to be accessible to families, that Led to our decision in 1999 to join the consortium working to launch this national prepaid 529 plan.

In the mid-1980s several states began offering prepaid tuition plans for their own schools. While they were considered a good way to save for state-funded schools, the plans offered Limited choice. That changed in 1996 when Congress added Section 529 to the tax code, a modification that allowed states to offer the more flexible and popular college savings plans that can be used at any school. The next step was Independent 529 Plan, launched in 1998 by a group of independent colleges and universities, predominantly in the South. At the time, Katharine Hanson, executive director of the Consortium of Financing Higher Education (COFHE), supported the concept and encouraged members of the Consortium, including Mount Holyoke, to become involved.

Another factor that predisposed the college favorably to Independent 529 Plan was our positive experience with the U Plan, Massachusetts' state prepaid tuition program. Unlike most state prepaid plans, the U Plan makes funds available to independent colleges and universities in the state, in addition to Massachusetts public institutions. Its being a prepaid plan, like Independent 529 Plan, led to our familiarity with the basic workings of prepayment, and our recognition that there was no significant administrative burden to participation. The U Plan did for Massachusetts what Independent 529 set out to accomplish for private institutions nationally.

Finally, the idea of a 529 plan that would be national in scope and dedicated to helping families plan and save for their children's college education at independent institutions struck me, and many of my colleagues, as an excellent complement to the state-sponsored 529 plans oriented toward public schools.

We believed the idea had many benefits for Mount Holyoke College. Nonetheless, we recognized that Independent 529 Plan entails a major financial commitment by its members, in terms of investment risk, management fees, and discounted tuitions. So, we developed a careful review process to ensure that we were making a sound business and financial decision that would benefit Mount Holyoke College and its students and alumnae.

ONE SIDE OF THE SCALE

The benefits of this 529 plan fall in two categories: those for the member institutions, and those for prospective students and their families. We identified three advantages of the new 529 plan to Mount Holyoke College:

Encouraging families to think of private college as on affordable option. Anything that provides a mechanism to plan and save for a private college education expands our universe of potential applicants and students. When parents leap to the assumption that they cannot afford an independent institution, they not only limit their options and their children's options, but they also funnel potential students away from our college.

Relieving Financial aid pressure. To the extent that Independent 529 Plan helps parents provide funds for their children's college educations, it relieves pressure on colleges' financial aid budgets, freeing money for students from financially deprived circumstances or decreasing the overall financial aid burden on the institution.

Enhancing alumni and employee relations. Member institutions promote Independent 529 Plan to alumni as a way to help graduates obtain an education for their children of the same caliber as theirs. At Mount Holyoke, we also inform faculty and staff about Independent 529 Plan as a way to save to send their children or grandchildren to the college or any other member institution.

Balancing these benefits are significant financial commitments that member institutions must make.

FINANCIAL COMMITMENT BY MEMBER INSTITUTIONS

Several key benefits to parents and families of Independent 529 Plan involve significant financial commitment by member institutions. Those commitments, against which we balanced the benefits, include:

Assuming 100 percent of risk. Account owners purchase as many years, or portions of years, of tuition at Mount Holyoke or other member schools as they want and can afford. They receive protection from investment fluctuations and from increased tuition costs if used as intended.

If they have purchased certificates for four years at Mount Holyoke College, their students are entitled to those four years of tuition when they arrive on our campus for freshman year. This is true regardless of our tuition at the time, and regardless of whether or not the deposits have appreciated sufficiently to fully compensate Mount Holyoke for those four years.

Mount Holyoke was willing to assume this risk for two reasons. First, unlike families, who must redeem their certificates when their children enter college, we expect a stream of redemptions from families over the years.

As a result, we will redeem some certificates during buff markets and others during bear markets. So, we are less vulnerable than families to market fluctuations and over time expect that market returns will equal or exceed increases in tuition.

And TIAA-CREF, the nation's largest pension fund manager with more than $300 billion in assets, provides investment management and administrative and marketing services to Independent 529 Plan. TIAA-CREF also manages 12 state-sponsored 529 plans. TIAA-CREF's participation added to our confidence in the enterprise.

Tuition discounts. Another major financial commitment by member institutions is the annual discount we are required to provide. This enables parents and other account owners to lock in tuition costs at less than today's price. Mount Holyoke sets its own discount rate, but the required minimum is one-half percent per year. We apply the discount to the amount of tuition pre-purchased. As our experience with the program evolves, we will look at our options for adjusting the discount rate annually for future purchases.

Assuming that our tuition increases would parallel the national average rate of 6 percent per year, adding an Independent 529 Plan annual discount rate of 1 percent would give the account owner the equivalent of earning a 7 percent return each year--tax-free.

Of course, actual savings will vary according to the tuition increases and the discount rates that we apply over time. For a family using investment vehicles outside of a 529 plan tax-free environment, the equivalent return would have to be well into the double digits to match the value of Independent 529 Plan.

Administrative costs and fees. We expect that, in attracting additional students through Independent 529 Plan, we will more than cover Mount Holyoke's portion of the annual management fees assessed to member colleges for administering the program, managing the assets, and running the Tuition Plan Consortium. (Those management fees are paid by deductions from earnings of the Plan's investments.)

THE DECISION PROCESS

Our first decision, in 1998, was to invest in the start-up effort to bring Independent 529 Plan into being. Given the advantages already described, this was a straightforward decision, made through discussion with the president and senior staff.

Later, in 2002-03, when the program was about to be implemented, our leadership team needed to make a final decision about whether we would become a participating institution.

Because Mount Holyoke is a very collaborative institution, we approached this decision by bringing together all interested parties, reviewing the costs and benefits and arriving at a shared decision.

Throughout the start-up phase of Independent 529 Plan, I kept the vice president for Enrollment and College Relations, the comptroller, and the director of Financial Assistance updated on the progress toward implementation and the evolving shape of the program.

We discussed what we had learned, reviewed the analysis provided by the Independent 529 Plan staff and consultants, and did our own analysis of how the plan, particularly the discount requirement, might impact Mount Holyoke in future years.

Because we would be committing to participation in Independent 529 Plan at a very early stage, we recognized that we would have no history of certificate redemption, investment appreciation, increased applications or enrollment, or the impact of the tuition discount to use as we made our decision.

Carefully reviewing the analytical information provided by Independent 529 Plan, we also did our own analysis of the possible future impact of Mount Holyoke's participation in the program.

Our conclusion: The benefits of making a Mount Holyoke education a more realistic option for more families--both in reality and in their perceptions--outweighed the financial obligations and risks.

MAKING IT HAPPEN: GETTING BUY-IN

As Independent 529 Plan completed the start-up phase and began to enroll members in FY2002-03, we brought President Joanne Creighton and her senior staff more directly into the discussion.

While they were generally aware of the work under way to develop the plan and Mount Holyoke's participation in it, we now discussed the benefits of actually joining the plan.

We covered the similarities and differences between Independent 529 Plan and the U Plan and were very dear about the meaning of the discount provision of Independent 529. The result of these discussions was a shared commitment to recommend joining to the Board of Trustees.

We also shared with the Trustees our participation in the start-up efforts for the plan as they were proceeding. So there was general familiarity with the program and its benefits before we asked for their approval I presented the recommendation for Mount Holyoke College to join the Independent 529 Plan to the Finance Committee of the Board of Trustees at its March 2003 meeting, using written materials provided by Independent 529 staff, together with an introductory narrative that described the plan and the college's participation to date.

The Finance Committee was supportive and brought the recommendation forward to the full Board of Trustees, who approved the college's participation.

Throughout the process, the issue of greatest concern was understanding the impact of the required tuition discount on the college over time.

Our analysis of the possible outcomes convinced us to take a very conservative approach to establishing the annual discount rate, a decision that was strongly supported by the Board of Trustees. Having said that, there was from the beginning a strong and widespread inclination to support the college's participation in Independent 529 Plan and there was no significant opposition at any stage of the process.

A number of state 529 plans have suffered through financial difficulty and administrative turmoil in recent years. Although that may have raised concerns about the viability of the concept in the minds of some, our experiences have caused no reason for worry. Our participation in Massachusetts' U Plan continues to work extremely well, and our confidence in the design and management of Independent 529 Plan give us confidence in the soundness of the prepaid 52g plan structure.

That's why we're pleased to be part of the Independent 529 Plan and look forward to it providing significant future benefits to families and colleges.

Independent 529 Plan--What It Is, How It Works

Independent 529 plan is a prepaid tuition program run by and for independent colleges. Currently, 246 institutions participate in the program, which is managed, administered, and marketed by TIAA-CREF, Tuition Financing, Inc., under contract to the member institutions. There is no involvement of state legislatures. Most importantly, investment risk is transferred from the purchaser to the participating colleges.

Parents or grandparents purchase, that is prepay for, Independent 529 Plan certificates for a specific child but not for a specific collage. Each certificate guarantees to percentage of tuition at each institution. Further, each participating institution offers an annual discount that adds value to the pre-purchased certificate.

Independent 529 Plan guarantees the purchaser, at the outset, that when the beneficiary enrolls at a member college, certificates may be redeemed for a specific amount of tuition. This guarantee holds, no matter how high the tuition may have grown by the time of enrollment.

Many Jo Maydew is vice president for Finance and Administration at Mount Holyoke College in South Hadley, Mass. She also serves as a director of Tuition Plan Consortium, the nonprofit organization that operates Independent 529 Plan.
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Author:Maydew, Mary Jo
Publication:University Business
Date:Aug 1, 2005
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