Private College 529 Plan, Which Locks In Tuition, Is Expanding

If a student ends up attending one of the participating schools, which include MIT, Duke, American University and almost 300 more institutions, those credits will be used to offset tuition costs and other qualified fees. They can't be used for room and board.

If a student doesn't enroll in one of the participating schools, the account balance can be transferred to a traditional 529 savings plan with no penalties but the earnings, which are tax-free, are capped at a 2% annual gain. The maximum losses are also capped at 2% annually.  Certificates must be held for 36 months from the purchase date before they can be redeemed and they can be used at any of the participating schools for up to 30 years.

Unlike traditional 529 plans, contributors do not choose among investment options. That is the purview of an investment committee which, according to Cole, invests in a balanced diversified portfolio of equities and fixed income funds that are designed to match tuition increases over time. The investments grow tax-free, as they would in a traditional 529 savings plan.

Participating colleges and universities guarantee the fixed tuition costs, so ultimately they are taking on the investment risk and they treat account balances as they would any 529 plan in considerations for financial aid. Oppenheimer is the plan manager.

Families who are interested in having their child attend one of the participating schools — and their numbers have been rising with nine additions last year — may want to open a Private 529 plan along with a traditional 529 plan, which doesn't cap gains or losses. Savingforcollege.com calls that combination "a perfect pair."

— Check out Top 20 Colleges Worth the Cost: Princeton Review on ThinkAdvisor.