Parents who pay for some tuition now will get enough interest to cover that same portion in the future, plus an additional return on their investment.
During tough economic times, socking money away for the kids' college fund may be the last thing on parents' minds. But efforts are under way to turn saving into something too good to refuse.
Dickinson College, a liberal arts school tucked away in Carlisle, Pa., recently announced a guaranteed interest rate much higher than previously available through the Independent 529 Plan (I-529), which offers prepaid tuition accounts for 274 private colleges and universities (a list that's growing).
In effect, those who pay for a portion of tuition now will be guaranteed to earn enough interest to cover that same portion in the future, plus an additional return on their investment – 4 percent, in Dickinson's case.
Savings in the I-529 and state-sponsored 529 plans also offer significant tax advantages. To encourage participation, 12 states currently have a 529 matching-grant program or pilot, typically geared to lower-income families. Several states also offer scholarships or discounts linked to their 529 plans.
Dickinson officials hope their move will inspire copycats within the I-529, which in turn could motivate more parents to save. Parents' preparation is the "third leg of the stool" when it comes to the accessibility of higher education, says Robert Massa, Dickinson's vice president of enrollment. But it's been getting a lot less attention lately, he says, compared with the two other legs – the need for reining in college costs and for boosting financial aid from colleges and the government.
"If parents don't save, the first two legs of the stool ... cannot sustain the price; parents have to do their share," Mr. Massa says.
Parents of high school seniors are prepared to meet only about 13 percent of the average total cost of four years of college (about $100,000), according to Fidelity Investments, which manages several state 529 plans. Parents of 15- to 18-year-olds are on track to cover a quarter of the costs, but those who have college savings accounts are on track to cover nearly half. Many parents mistakenly believe savings count heavily against them in calculating financial aid.