The Pennsylvania 529 Guaranteed Savings Plan is a lower-risk college savings vehicle that lets you save for higher education without navigating the ups and downs of the stock and bond markets.
The Pennsylvania Treasury Department does the investing work for you, placing money in the GSP Fund, a separate fund established for the GSP by the Commonwealth of Pennsylvania. Treasury invests all participant contributions through professional investment managers, who buy and sell stocks, bonds, and other investments with the specific goal of seeing that the growth meets or exceeds tuition increases. Regardless of how well or poorly these investments do, your account growth, when used for qualified college expenses, is based on tuition increases. Any growth is subject to a maturity period.*
Meeting this investment growth is the obligation of the GSP Fund. This means that the Fund, not each account owner, assumes the risk for covering tuition inflation increases.
When your student is ready for college or career school, you tell the GSP to pay an amount from your available account balance to cover any qualified higher education expenses. It’s that simple!
The chart assumes annual tuition inflation rates: Community Colleges, 3.5%; State System of Higher Education, 4.5%; State-Related Universities, 6.53%; Private Four-Year Colleges, 5.5%; and Ivy League Colleges, 5.5%. Although these projections are based on historical and projected rates of tuition inflation at each type of institution, there can be no assurance that they will accurately reflect future increases. Projected tuition rates do not represent actual tuition costs at a specific school. Tuition inflation prjections and calculations provided by Actuarial Resources Corporation.
What is it?
The “guarantee” of the GSP is that, when you use your account for qualified college expenses, the growth on your contributions is based on tuition increases not on the investment performance that the GSP Fund achieved on those contributions. So, if during the time your money has been in the GSP, tuition increases, have been greater than investment performance – even if the investment value of your contributions has actually gone down – the GSP Fund is still obligated to pay for your college expenses at the tuition-increase value. Tens of thousands of account owners have benefited from this guarantee.
Why it works…
The concept behind the guarantee is that for some accounts, the GSP Fund’s investment performance will be greater than tuition increases and for some it will be lower, but over the long-term and the many thousands of GSP accounts, the gains and losses will balance out. To help make sure that it does and that the GSP Fund will be able to live up to its obligations, the GSP is authorized to include “premiums” in setting annual GSP Credit Rates – the amount you need to contribute to equal one GSP Credit. Premiums are amounts over the actual tuition amount charged by the schools that are included in the GSP Credit Rate.
What it is NOT!
The “guarantee” is not a promise by the Commonwealth or any state agency that it will stand behind the GSP Fund if the Fund were to run out of money to meet the guarantee. The Commonwealth has no legal obligation to make good on the promise made by the GSP Fund. In other words, the guarantee is made only by the Fund itself and not by any other entity, including the Commonwealth of Pennsylvania.
Here’s an example.
A contribution of $9,018 was made to a GSP account in 2002. The account owner requests to use the entire value in the account for a payment to Penn State for the Spring 2011 semester. From 2002 to 2011, tuition inflation increased the value of the contribution from $9,302 to $20,436. During that same time, the investment performance achieved by the GSP Fund on the contribution increased from $9,302 to $15,527. The GSP Fund will pay the higher tuition inflation value of $20,436 to Penn State even though the investment performance on the contribution was just $15,527. This example assumes that account maintenance fees were paid separately.
The GSP uniquely blends lower-risk with growth that keeps up with tuition increases. Risk-free options, such as CDs, are unlikely to grow enough to keep up with rising tuition. Options with returns potentially higher than tuition inflation, such as stocks, have much greater risk of losing your investments.
*In order for a contribution and any related growth to be used for qualified withdrawals, a “maturity period” ranging from approximately nine months to approximately eighteen months must elapse from the date that the contribution was made to the date the contribution was withdrawn to pay qualified higher education expenses. Please see Part 2. C.4.e.ii of the GSP Disclosure Statement for more information.