New Research Finds Combining 529 Prepaid and Savings Plans Potentially Offers Superior Risk-Adjusted Returns

Parents’ college savings could benefit from using the same strategy as retirement savings

ST. LOUIS--()--New research shows parents saving for a child’s college could benefit from diversifying 529 plan types, blending a private or state 529 prepaid plan with a 529 savings plan linked to stocks or bonds.

CERTIFIED FINANCIAL PLANNER™ Brian Boswell, founder of 529 Expert, LLC, performed an in-depth analysis of returns on 529 prepaid and 529 savings plans over 22- and 40-year periods to determine whether investors would benefit from investing in both types of plans. Boswell’s research and analysis showed that using a combination of 529 prepaid and savings plans mitigated the risk of investing in just one plan and improved the overall performance of a college savings portfolio.

Private College 529 Plan commissioned Boswell’s research to help savers pick the right 529 strategy.

State prepaid plans allow a family to purchase future tuition at fixed price levels to avoid future increases. 529 savings plans offer investments in a mix of equity and fixed income mutual funds and ETFs authorized by the sponsoring state. For all plans, earnings are tax-free if used toward tuition and other eligible higher education expenses.

“Each plan has unique performance characteristics, making 529 prepaid and savings plans natural complements to each other,” said Boswell. “The addition of prepaids to a more traditional savings plan investment mix of equity and fixed income securities improved the overall risk-adjusted return.”

A recent Gallup poll of parents with children under 18 found that paying for college was their top financial concern, ahead of retirement. For the average American, a college education is the second largest single expense after their home. Unlike retirement savings, when investors often combine a 401(k) with other investments such as IRAs and other taxable accounts, 529 account holders typically rely on a single plan, Boswell’s research shows.

Private College 529 Plan allows families to save for higher education by “locking in” current private college and university tuition costs. For example, assume tuition at private College A is $35,000 a year and a parent contributes $35,000 to a Private College 529 Plan account with their 8-year-old child as beneficiary. If tuition rises an average of 4% a year, in 10 years College A’s tuition would be $51,809. By prepaying, the parent would save $16,809 on that year of tuition.

"This research shows how prepaid and savings plans are like different asset classes," said Private College 529 President and CEO Robert Cole. "Holding both as part of a college savings strategy makes a lot of sense in reducing risk and improving potential returns."

From 1976 to 2018, college tuition increases have exceeded consumer inflation, meaning college purchasing power has eroded faster than the dollar. Boswell modeled conservative, moderate and aggressive 529 savings plan age-based portfolios from 1997-2018 using a combination of the S&P 500 Index, Bloomberg Barclays U.S. Aggregate Bond Index, and the 3-month T-Bill to compare against college tuition and fee inflation rates over the same period. He used college tuition and fee rates taken from College Board data as a proxy for prepaid returns.

In 114 combinations of model 529 savings plan and prepaid plan portfolios, the data showed that nominal returns fell slightly while the risk-adjusted returns improved dramatically when adding prepaid assets to the savings plan portfolios. The data suggest an optimal investment portfolio include 50% or more of assets in prepaid 529s to optimize risk-adjusted returns.1

“I had expected some benefit but was honestly surprised by the extent to which adding prepaids helped optimize the overall college portfolio,” Boswell said.

About Private College 529 Plan

Private College 529 Plan is the only way families can save money on the cost of attending nearly 300 leading private colleges and universities nationwide. No matter how much tuition increases over the years, or how volatile the financial markets are, families lock in current rates that can be used at any of the participating colleges and universities.

Private College 529 is not an investment. Families buy tomorrow's tuition at today's prices in the form of Tuition Certificates. They name a beneficiary when opening an account but don't select a college or university until the student enrolls. The increase in value and distributions are federal tax free if used for qualified higher education expenses.

Private College 529 is the only 529 plan not run by a state. Participating colleges and universities own the Plan, and they guarantee the tuition families prepay.

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Participation in Private College 529 PlanSM does not influence or guarantee admission to any college or university.

The information contained herein is subject to change without notice. This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other advisor regarding your specific legal, investment or tax situation.

Private College 529 PlanSM is established and maintained by Tuition Plan Consortium, LLC. Invesco Advisors, Inc. is the program manager. Participation in the Plan does not guarantee admission to any college or university, nor does it affect the admissions process. Tuition Certificates are not insured or guaranteed by the FDIC, TPC, any governmental agency or its affiliates.

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1 Boswell, Brian; The Optimal College Savings Portfolio, August 2019.

Purchasers should carefully consider the risks associated with purchases and refunds of Tuition Certificates. The Disclosure Statement, including the Enrollment Agreement, contains this and other information about the Plan, and may be obtained by visiting privatecollege529.com or calling 1 888 718 7878. Purchasers should read these documents carefully before purchasing a Tuition Certificate.

Contacts

Jessica Cooper, Finn Partners
202-884-7334
jessica.cooper@finnpartners.com

Release Summary

New research from Private College 529 Plan shows parents saving for a child’s college could benefit from diversifying 529 plan types.

Contacts

Jessica Cooper, Finn Partners
202-884-7334
jessica.cooper@finnpartners.com