Like pension plans, prepaid tuition 529 plans are disappearing. Virginia closed its Prepaid529 plan to new enrollments on May 1, 2019, after facing pressure to lower the costs of prepaid tuition contracts, a move that allegedly would have threatened the health of the program.
Frankly, the prepaid program was significantly smaller than the other two 529 plans offered by Virginia. When it closed to new enrollments, the total assets under management (AUM) of the prepaid plan was $2.8 billion, a little over half of the direct-sold, invest529 savings plan AUM ($5.1 billion). And both of these were dwarfed by the whopping $66.4 billion AUM in the advisor-sold advisor-sold CollegeAmerica savings plan. Gotta hand it to those advisors, they really know how to push their product!
The idea of prepaid tuition is appealing to many parents who are worried about escalating costs of college, and not sure if they want to take on choosing investing options. Without a prepaid tuition option, what can you do?
In January of this year, Virginia’s invest529 unveiled a new portfolio option: Tuition Track Portfolio. Classified as a “principal protected portfolio”, the portfolio’s price is 1/100th of the average tuition and fees of all public, 4-year granting universities in Virginia. The list of schools including expensive William & Mary (tuition: $23,628/year) and the less-expensive VSU (tuition: $9,154). The price-per-share is updated each year on or about July 1st.
- Either the account owner or beneficiary must be a resident of Virginia
- Units are eligible for use after being held for three or more years and the beneficiary reaches the “expected usage date”. The “expected usage date” is typically the year of high school graduation
- No management or administrative fees
- Limited to 1,000 units per beneficiary
- You can’t buy shares following June 30th of year when the beneficiary is expected to graduate from high school
- Need to deplete it within 10 years of the “expected usage date”. After that, it gets transferred into a FDIC insured option
You may have noticed there are two restrictions on using units of the Tuition Track option. First, if you use the funds before holding them for three years, you only get back what you contributed. Ouch! You can think of this like a three year CD, except if you withdraw it early you lose all the interest. Forget the clever idea of contributing on June 30th and immediately rolling it out on July 1st for a single-day gain of X%, where X is the delta between this year and last year’s average tuition.
Second, you’re also penalized if you use the funds before the “expected usage date”. If you’ve held it less than three years, you again only received back what you contributed. If you’ve held the shares for three or more years, then you get back your contributions, plus “tuition track interest”, which looks like it tracks something similar to a money market rate. So not much. You really don’t want to use these for K-12 expenses, only college or beyond.
If you’ve held the units for more than three years AND you’ve passed the “expected usage date”, then your units will convert into whatever the current average tuition rate is across all Virginia public universities.
If you use this option, you should always wait until after July 1st to withdraw money. That annual cliff is hazardous.
If you’re a parent that doesn’t want to worry about investing and instead are just worried about escalating tuition costs, this may be a good option. But the Tuition Track portfolio is not a guaranteed tuition plan, even if it’s trying to pretend like one.
You should think of this as just another type of savings account, except instead of tracking the stock or bond markets, it instead tracks average tuition across public schools in Virginia. You can still use the money at private or non-Virginia universities. You can still use the money for room and board, and other qualifying expenses. And even if you have saved 100 units (i.e. 100% of the average tuition of Virginia public universities), you could still end up with a tuition shortfall if you got to a Virginia public school that is more expensive than the average.
And if the average tuition across Virginia goes down (unlikely), it’s possible that the account value goes down relative to the other savings options. This would be especially painful if tuition everywhere else went up at the same time, and your student planned on attending college out-of-state.
I’ll probably stay away from the Tuition Track option. While college expenses have been escalating, it’s only been at a 5% average over the last decade compared to a 14% return with the Total Stock Market option. With fourteen more years ahead of me before my last child concludes her education, I’m confident that I’ll get a better return using the equity options instead of the Tuition Track. Your timeline and risk portfolio could be totally different from mine and it could be a great option for you and your student.
Have a question or comment? I’d love to hear from you in the comments below.
Note: If you’re like me and enjoy geeking out with the data, the College Savings Plans Network has great historical data on the AUM of the various 529 plans across the country.