COLLEGE SAVINGS 101

Savingforcollege.com

529-plan help for low and middle-income families
http://www.savingforcollege.com/articles/20090904-529-plan-help-for-low-income-families

Posted: 2009-09-04 - Lori Johnston is a freelance writer in Georgia.

by Lori Johnston

Folks with high incomes aren't the only ones saving for higher education.

More than a dozen states offer matching contributions to Section 529 college-saving plans that encourage low- and moderate-income families to save now to pay for future schooling.

Those assistance plans are in addition to scholarship programs and unique efforts by private individuals, such as the Harold Alfond College Challenge grant program , to pique the interest of families that consider 529 plans a low priority.

Difficult economic times haven't caused states to pull back on these initiatives, despite budget problems that have kept others from joining in, experts say.

"It's not due to a lack of desire," says Jacqueline T. Williams, director of the Washington, D.C.-based College Savings Initiative, a joint venture of the New America Foundation and the Center for Social Development. It's especially challenging, she says, to locate available financial resources to fund some of these programs, particularly in the current economy.

Since prepaid tuition and savings plans were created in the late 1980s, some states have tried to provide incentives for low- and moderate-income families, according to the College Savings Plans Network, a nonprofit association representing states that administer 529 college savings and prepaid plans.

"There is a general recognition that the states do have to do something along these lines to stay on the good side of Congress and the Treasury, as a reason for the states being in charge of the 529 plans," says Joe Hurley, a CPA and founder of Savingforcollege.com.

Data from the College Savings Plans Network shows at least a dozen states offer a grant program, which includes matching contributions and/or accounts set up for children at birth as part of 529 plans. Fourteen states, such as Florida, California and Illinois, offer merit and need-based scholarships as part of 529 plans.

Hurley says the trend over the past four or five years has been toward more states offering matching contribution programs. Most programs are limited to families that don't reach certain income levels -- typically topped at $40,000 adjusted gross income for singles and $80,000 for married filing jointly.

Here are the highlights of programs in 12 states, with the matching amounts, which vary from a modest percentage of the contribution to as much as two times that amount:

Arkansas: Matches up to $500 annually of family contributions to the state's GIFT College Investing Plan through the Aspiring Scholars Matching Grant program.

Colorado: Matches up to $500 per year for up to five years through the CollegeInvest 529 account.

Louisiana: Matches 2 to 14 percent of amounts deposited in the START Saving Program, the state's 529 college savings plan. Also provides a double state tax deduction of up to $4,800 per account annually for residents who open a START account for needy families.

Kansas: Matches up to $600 for families through the K.I.D.S. (Kansas Investments in Developing Scholars) matching grant program.

Maine: Everyone born after Jan. 1, 2009, receives a one-time $500 grant from the Harold Alfond College Challenge Grant program to open a 529 account with the NextGen College Investing Plan. Residents born before that date receive a one-time $200 grant with a $50 initial contribution.

Michigan: Matches up to $200 for first-year contributions to the state's 529 college savings plan.

Minnesota: Matches up to $400 per year for contributions (minimum $200) to the Minnesota College Savings Plan.

North Dakota: Matches up to $300 for up to three years or $300 one-time, depending on income thresholds, through College SAVE.

Oklahoma: Deposited $1,000 into Oklahoma College Savings Plan in 2007 for more than 1,300 randomly selected families with newborns through the SEED for Oklahoma Kids program, a national seven-year study that will look at the effort's impact. Matches up to $250 each year, over four years, for families that contribute to the account.

Pennsylvania: Matches contributions dollar for dollar up to $2,000 for families with the Pennsylvania College Savings Program's 529 plan.

Rhode Island: Matches up to $500 annually for families through the CollegeBoundfund Matching Grant Program.

Utah: Matches up to $400 annually on contributions to Utah Educational Savings Plan.

Successes and obstacles

Kansas' three-year pilot program, which began in 2006, has awarded $582,239.75 to 1,111 participants. The average contribution was $515 in fiscal year 2007, $516 in fiscal year 2008 and $531.86 in fiscal year 2009. The three-year total participant contributions of $420,475, which is in addition to the amount eligible for the state's match, shows that the program is a powerful incentive to encourage families to save for their children's future, according to Scott M. Gates, General Counsel and director of Learning Quest Education Savings Program in the Kansas State Treasurer's Office.

In Minnesota, the state has awarded 7,710 matching grants totaling more than $1.8 million since the plan began in September 2001. The funds in matching-contribution programs typically are held in a separate account and are only dispersed if the beneficiary attends college, Hurley says.

Budget constraints aren't the only reasons some states aren't offering incentives for low- and moderate-income families. Some feel they're doing enough by allowing a tax credit from 529 contributions, says Hurley. He adds that a tax credit is similar to a matching contribution for a participant as long as they pay state taxes.

"States have done a good job of increasing the tax benefits associated with these plans, but most of the tax benefits have accrued not to lower-income families because they may not pay income taxes due to their income," says Williams from College Savings Initiative. "As a consequence, they would not benefit from a deduction."

Hurley says families have to weigh the cost of 529-plan fees with tax benefits to determine whether this route is better than investing in mutual funds.

Williams says reducing or eliminating fees and removing a 529 account from consideration when determining need-based aid are other ways states can provide incentives for participating. Making it available for people to sign up for plans through an employer also could make it "more automatic for people to invest."

Hurley has proposed the rules be clarified to allow people with 529 accounts to donate them to scholarship organizations providing funds for needy individuals, but says doing so would likely require a decision by the Treasury Department, Internal Revenue Service or Congress.

Offering a set of low-risk investment options also could make families more willing to step forward and set aside money to fund education in the future, says Williams.

Posted September 4, 2009

Folks with high incomes aren't the only ones saving for higher education.

More than a dozen states offer matching contributions to Section 529 college-saving plans that encourage low- and moderate-income families to save now to pay for future schooling.

Those assistance plans are in addition to scholarship programs and unique efforts by private individuals, such as the Harold Alfond College Challenge grant program , to pique the interest of families that consider 529 plans a low priority.

Difficult economic times haven't caused states to pull back on these initiatives, despite budget problems that have kept others from joining in, experts say.

"It's not due to a lack of desire," says Jacqueline T. Williams, director of the Washington, D.C.-based College Savings Initiative, a joint venture of the New America Foundation and the Center for Social Development. It's especially challenging, she says, to locate available financial resources to fund some of these programs, particularly in the current economy.

Since prepaid tuition and savings plans were created in the late 1980s, some states have tried to provide incentives for low- and moderate-income families, according to the College Savings Plans Network, a nonprofit association representing states that administer 529 college savings and prepaid plans.

"There is a general recognition that the states do have to do something along these lines to stay on the good side of Congress and the Treasury, as a reason for the states being in charge of the 529 plans," says Joe Hurley, a CPA and founder of Savingforcollege.com.

Data from the College Savings Plans Network shows at least a dozen states offer a grant program, which includes matching contributions and/or accounts set up for children at birth as part of 529 plans. Fourteen states, such as Florida, California and Illinois, offer merit and need-based scholarships as part of 529 plans.

Hurley says the trend over the past four or five years has been toward more states offering matching contribution programs. Most programs are limited to families that don't reach certain income levels -- typically topped at $40,000 adjusted gross income for singles and $80,000 for married filing jointly.

Here are the highlights of programs in 12 states, with the matching amounts, which vary from a modest percentage of the contribution to as much as two times that amount:

Arkansas: Matches up to $500 annually of family contributions to the state's GIFT College Investing Plan through the Aspiring Scholars Matching Grant program.

Colorado: Matches up to $500 per year for up to five years through the CollegeInvest 529 account.

Louisiana: Matches 2 to 14 percent of amounts deposited in the START Saving Program, the state's 529 college savings plan. Also provides a double state tax deduction of up to $4,800 per account annually for residents who open a START account for needy families.

Kansas: Matches up to $600 for families through the K.I.D.S. (Kansas Investments in Developing Scholars) matching grant program.

Maine: Everyone born after Jan. 1, 2009, receives a one-time $500 grant from the Harold Alfond College Challenge Grant program to open a 529 account with the NextGen College Investing Plan. Residents born before that date receive a one-time $200 grant with a $50 initial contribution.

Michigan: Matches up to $200 for first-year contributions to the state's 529 college savings plan.

Minnesota: Matches up to $400 per year for contributions (minimum $200) to the Minnesota College Savings Plan.

North Dakota: Matches up to $300 for up to three years or $300 one-time, depending on income thresholds, through College SAVE.

Oklahoma: Deposited $1,000 into Oklahoma College Savings Plan in 2007 for more than 1,300 randomly selected families with newborns through the SEED for Oklahoma Kids program, a national seven-year study that will look at the effort's impact. Matches up to $250 each year, over four years, for families that contribute to the account.

Pennsylvania: Matches contributions dollar for dollar up to $2,000 for families with the Pennsylvania College Savings Program's 529 plan.

Rhode Island: Matches up to $500 annually for families through the CollegeBoundfund Matching Grant Program.

Utah: Matches up to $400 annually on contributions to Utah Educational Savings Plan.

Successes and obstacles

Kansas' three-year pilot program, which began in 2006, has awarded $582,239.75 to 1,111 participants. The average contribution was $515 in fiscal year 2007, $516 in fiscal year 2008 and $531.86 in fiscal year 2009. The three-year total participant contributions of $420,475, which is in addition to the amount eligible for the state's match, shows that the program is a powerful incentive to encourage families to save for their children's future, according to Scott M. Gates, General Counsel and director of Learning Quest Education Savings Program in the Kansas State Treasurer's Office.

In Minnesota, the state has awarded 7,710 matching grants totaling more than $1.8 million since the plan began in September 2001. The funds in matching-contribution programs typically are held in a separate account and are only dispersed if the beneficiary attends college, Hurley says.

Budget constraints aren't the only reasons some states aren't offering incentives for low- and moderate-income families. Some feel they're doing enough by allowing a tax credit from 529 contributions, says Hurley. He adds that a tax credit is similar to a matching contribution for a participant as long as they pay state taxes.

"States have done a good job of increasing the tax benefits associated with these plans, but most of the tax benefits have accrued not to lower-income families because they may not pay income taxes due to their income," says Williams from College Savings Initiative. "As a consequence, they would not benefit from a deduction."

Hurley says families have to weigh the cost of 529-plan fees with tax benefits to determine whether this route is better than investing in mutual funds.

Williams says reducing or eliminating fees and removing a 529 account from consideration when determining need-based aid are other ways states can provide incentives for participating. Making it available for people to sign up for plans through an employer also could make it "more automatic for people to invest."

Hurley has proposed the rules be clarified to allow people with 529 accounts to donate them to scholarship organizations providing funds for needy individuals, but says doing so would likely require a decision by the Treasury Department, Internal Revenue Service or Congress.

Offering a set of low-risk investment options also could make families more willing to step forward and set aside money to fund education in the future, says Williams.

Posted September 4, 2009

 

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