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00-3: Morphing from prepaid to savings
Monday, January 24th 2000
As I have reported previously, the Department of Education has announced its position that an account in a 529 savings plan is to be treated as an asset belonging to the account owner for purposes of determining federal financial aid eligibility, but that a distribution from a contract with a 529 prepaid tuition plan is to be treated as a financial "resource" that reduces "need" on a dollar-for-dollar basis.
Although the DOE ruling is certainly good for savings plans, the basis for making such a sharp distinction is questionable at best. Section 529 of the Code doesn't establish two classes of 529 plans, it merely describes each type as being acceptable under the tax law. The provisions of Section 529 apply equally to prepaid tuition plans, savings plans, and 529 plans that incorporate features of both. What's the big difference, for example, between Montana's savings plan that provides an investment return equal to the average increase in tuition nationwide, and Ohio's prepaid tuition plan that provides an investment return equal to the average increase in tuition among Ohio's public institutions? There really isn't much.
The State of Pennsylvania is now attempting to prove my point that the line between prepaid tuition plans and savings plans in indeed very thin. Legislation for the metamorphosis of the Tuition Account Plan (TAP) from a prepaid tuition plan to a savings plan is now being put in place. How are they doing this? Among several proposed changes, there are only two that will apparently make the difference. Number one, the program fund will share investment surpluses (growth beyond the actuarially determined obligation for future tuition payments) with program participants. Number two, they intend to change the name of the program to the "Tuition Account Guaranteed Savings Program".
That Pennsylvania believes it can get a better financial aid answer for its plan participants with these changes demonstrates the unevenness of the DOE policy. And on top of these changes, Pennsylvania also intends to open a second savings plan, one that will look more like the traditional savings plan model now found in many other states. This one will lack the tuition inflation guarantee of the current plan, but will invest participants' contributions more aggressively.
Two savings plan in one state. While not quite revolutionary, the proposals certainly evidence the evolution of 529 plans and they also demonstrate the state's clear commitment to make its program among the very best. Much credit goes to Treasurer Barbara Hafer who has clearly worked to make much-needed improvements in the Pennsylvania 529 plan since her start in 1997.
There is little doubt in my mind that we will continue to see the "merger" of the prepaid tuition contract and the educational savings account. The state that provides a guaranteed tuition option along with a market investment option is offering all things to all people.
But what is the DOE going to do then?
» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
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