Pennsylvania Prepaid 529 Plan

Pennsylvania offers two types of 529 plans: an investment plan using stock and bonds funds, and a prepaid tuition plan described here.

The name of the plan is the Pennsylvania 529 Guaranteed Savings Plan, or PA 529 GSP for short. Despite its name, the GSP is not guaranteed by the Commonwealth of Pennsylvania. The "guarantee" refers to the plan's promise to match tuition inflation regardless of the plan's investment performance, and to return unused contributions at a minimum.

Although this is known generically as a "prepaid" plan as distinct from an "investment" plan, the GSP has much more flexibility than some prepaid plans. The PA 529 GSP offers payments to virtually unlimited choices of colleges, including out-of-state colleges, with the tuition inflation level determined at the time of withdrawal. This makes the PA 529 GSP more attractive than "prepaid" tuition plans locked into a particular school, set of schools, or schools within a single state.

Notable Features of the Plan
The features of the Plan are described informally at the official web site, and formally in the disclosure statement.

Tuition Credits
Contributions to a GSP account purchase "credits" priced at approximately one-twelfth the price of a semester at the chosen school or type of school, based on the cost of a semester at the time of the contribution. When a qualified withdrawal is requested, the GSP prices the same credits at the credit rate at the time of the withdrawal, based on the cost of a semester at the time of the withdrawal. In effect, the contributions grow at the rate of the tution increase between the time of the contribution and the time of the withdrawal. While the concept of the plan paying back contributions with tuition inflation is simple in concept, the GSP has details that can be complicated and sometimes counter-intuitive. The (prospective) account owner should be aware of these details to properly plan for college costs and avoid surprises at withdrawal time.

Tuition Inflation Levels
The GSP defines and prices tuition credits at specific Penn. publicly-supported schools, as well as a handful of levels priced at average tuition costs in a class of schools. Almost 100 separate Penn. college programs of study are priced, with separate in-state and out-of-state student credit prices for each.

In addition to the many specific Penn. public college tuition levels priced by the GSP, there are five average tuition levels available:
 * State system of higher education (average of 14 separately-tracked colleges)
 * State-related universities (average of 4 separately-tracked colleges)
 * Pennsylvania community colleges (average of 14 separately-tracked colleges)
 * Pennsylvania private four-year colleges average
 * Ivy League school average

Although all but the Ivy League average tracks only Pennsylvania schools, qualified withdrawals at a chosen level can be used at any college, not just Pennsylvania colleges. See Tuition Level at Withdrawal below.

The credit rate for all tuition levels are reset once per year on September 1. Contributions received after September 1 use the higher credit rate; similarly withdrawals after September 1 also use the higher credit rate. Therefore, account owners should contribute before Sept. 1 but withdraw on or after Sept 1.

Credit Premiums
The GSP may set a credit rate for contributions that is more than the actual tuition "in order to maintain the fiscal integrity of the GSP Fund". The additional amount is called a "premium" by the GSP, so that the additional "premium" amount for contributions is distinguished from the credit rate for withdrawals. This generally happens when a particular tuition level is rising much faster than other levels. For instance, in the last few years the Penn State tuition level has included premiums.

Tuition Level at Withdrawal
Unlike some prepaid tuition plans, the GSP does not force an account owner to lock into a tuition inflation rate when an account is opened or when making contributions. An account owner can change the credit rate at any time, but only the tuition level for the account at the time of a qualified withdrawal effects the amount received.

There are two possibilities for setting the tuition level that applies to a qualified withdrawal:


 * If the beneficiary attends a Pennsylvania public institution, as defined by the GSP and tracked by a specific set of credit rate, the tuition level must match the particular institution. The GSP will change the tuition level if necessary, as indicated on the tuition bill you must provide to the GSP to request a qualified withdrawal.


 * If the beneficiary attends any school besides Penn. public institutions, including all in-state or out-of-state private schools and all out-of-state public schools, the account owner may choose any available tuition level before making the withdrawal. For example, the account owner can determine the tuition level that provides the greatest gains for the set of contributions made by the owner in the past, and change to that most-favorable credit rate before requesting a qualified withdrawal.

Tuition Level Changes all Contributions
When the account owner (or the GSP) changes the tuition level for an account, the credit rate for all contributions in the account change to the rate for that tuition level at the time of the contribution. In other words, the credit rate and credits purchased are adjusted for all past contributions exactly as if the account owner had already chosen the new tuition level at the time of the past contributions.

This is unlike traditional investments in stocks and mutual funds where the price paid for an investment unit is set only at the time of purchase. This can be a source of confusion for new account owners familiar with traditional securities investments. The amount and date of past contributions cannot be changed, but the credit rate and credits purchased can be changed at any time including at the time of a withdrawal.

When a qualified withdrawal is requested, the tuition level for the account at the time of the request is used to determine the credit rate (and any premiums) applicable to each contribution, the number of credits purchased for each contribution, and the current credit rate applied to the credits purchased. In effect, the percentage increase in the credit rate from the time of the contribution to the time of the withdrawal is the percentage gain of the contribution used for the withdrawal.

First In – First Out
A qualified withdrawal request is satisfied by taking sufficiently inflated amounts from the oldest contribution, the next-oldest contribution, and so on until the amount requested is satisfied. In other words, contributions are used in "first in first out" order, which almost aways results in the largest available gains in the account.

Maximizing benefits of the plan
Based on the rules of the plan, account owners can choose to use certain techniques to maximize their benefits. The use of these techniques may not benefit owners in the future if the rules in the plan change, or may even become counter-productive. An account owner should be familiar with the disclosure statement that defines the plan rules and monitor changes to it. Note that the plan rules can change at the discretion of the the Treasurer of the Commonwealth of Pennsylvania, or due to changes in applicable Pennsylvania law.

Contribution timing
TBD: when to contribute

Exploiting multiple accounts
TBD: using multiple accounts and transfers to minimize fees and maximize returns

More maximization advice items here
TBD

References and Footnotes
The word "Disclosure" in these references refers to the official GSP disclosure, followed by a section number in that document.