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COLLEGE SAVINGS 101

Match play: Some states kick in 529 plan dollars

Christina Couch is a freelance writer living in Chicago.

by Christina Couch

The quickest way to give your 529 college savings plan a financial boost is to let someone else do it for you.

Operating like employer matches on company 401(k)s, matching grant programs provide free financial rewards to low- and middle-income parents saving for their child's education. Currently available through 10 state 529 plans -- Arkansas, Colorado (now on hold until Feb. 2011), Kansas, Louisiana, Maine, Minnesota, North Dakota, Rhode Island, Utah and Nevada -- as well as nationwide through an array of nonprofit organizations, matching-grant programs chip in money for every college dollar that plan holders contribute up to a certain benchmark in our 529 plan. Here's how to get your hands on the free loot.

Know the rules

Like colleges themselves, each 529-plan, matching-grant program comes with its own rules, eligibility requirements and limitations, explains Liz Robinson, spokeswoman for Upromise Investments, the firm that administers 529 plans for 11 states and the matching grant programs for Nevada, Arkansas and North Dakota.

"Basically how it works is that as parents under a certain income level save, their money up to a certain point gets matched," says Robinson. "Sometimes it's dollar for dollar, sometimes it's two matched dollars for every one invested or one matched dollar for every two or three invested. It depends on the state."

While certain states like Kansas simply provide a dollar-for-dollar match for contributions up to $600 for 529 plan holders with incomes below 200 percent of the poverty line (approximately $44,100 for a family of four), other states like Arkansas have a tiered distribution system. Account holders with adjusted gross incomes of $30,000 or less receive two grant dollars for every dollar invested up to $500 annually. In addition, 529 plan holders with incomes from $30,001 to $60,000 receive a one-to-one match up to $500.

Louisiana adopts a sliding scale and matches between 2 percent and 14 percent of annual deposits saved by 529 plan owners with incomes of $100,000 and less. States also vary greatly in terms of how much they'll match, how long the beneficiary needs to be enrolled before receiving the grant and whether the grant is offered once or annually.

"No matter how much the match is, it's still free money," says Robinson. "Sometimes, we have so few people enroll, it's hard to give away."

Go national

The catch is that 529-plan, matching-grant programs only apply to account holders in that state. For everyone else, the only alternative is an Individual Development Account, or IDA, matched savings program. Offered through nonprofit organizations in every state except Wyoming, these accounts are designed for low-income savers. They provide a match of up to eight free dollars for every dollar invested and can be used to pay for education, buy a first home or start a small business. Getting your hands on one can be tricky.

"The requirements and the match amount are based on the program in your area," says Emily Appel, savings program director for Capital Area Asset Builders, a nonprofit based in Washington, D.C., that provides a 3-to-1 match for IDA contributions up to $1,500.

"Generally, there's a residency requirement to enroll. There's an income requirement; usually it's about 200 percent of the poverty line. So for a household of one adult, that's about $21,660 of earned income from full- or part-time work, self-employment or a stipend from job training," Appel says.

Unlike those receiving a 529 plan match, IDA holders also are required to make monthly contributions and take financial education classes to stay with the program. Critics argue that it's still not enough. Since IDA and 529-plan, matched-savings programs come with grant caps ranging from a few hundred to a few thousand dollars, even those enrolled in generous programs who max out their grant matches every year still won't come close to being able to afford a full college education without additional help.

"Our goal isn't to extract the full cost of college out of low- and moderate-income families. Our goal is to encourage savings," explains Jack Rayburn, manager of the Minnesota College Savings Plan. "This is just something to help families get started."

Posted August 13, 2010