ERIC ED482129: Goals and Implementation Issues for State Prepaid Tuition and College Savings Programs.

7 Pages·2000·0.2 MB·English

by  ERIC

DOCUMENT RESUME
ED 482 129
HE 036 375
Marshall, Joan
AUTHOR
Goals and Implementation Issues for State Prepaid Tuition and
TITLE
College Savings Programs.
2000-00-00
PUB DATE
5p.; In: National Tax Association Annual Conference on
NOTE
Taxation Proceedings (93rd, Santa Fe, NM, November 9-11,
2000). Washington, DC: National Tax Association, 2000. p96-
98
Reports
PUB TYPE
Descriptive (141)
Speeches/Meeting Papers (150)
EDRS PRICE EDRS Price MF01/PC01 Plus Postage.
Debt (Financial); Financial Aid Applicants; *Higher
DESCRIPTORS
Education; Loan Repayment; Socioeconomic Status; Student
Financial Aid; Student Loan Programs
ABSTRACT
One of the goals of state prepaid tuition and college savings
programs is that parents will soon consider participating in Section 529
plans for future higher education costs as commonly as they enroll in 401K
plans for their retirement. Too many families are taking on far too much debt
for college expenses, and tuition has been consistently rising at double the
rate of inflation. The size of student loans is increasing, and more students
are taking out loans. The ability of a state to increase the number of
families who are prepared to meet higher education costs should eventually
relieve pressure on that state's need-based financial aid requirements. As of
October 17, 2000, 65 total programs were either operational or scheduled to
launch. Establishing these programs and achieving broad-based acceptance is
not easy, but such programs should continue to grow as families accept the
responsibility of paying what they can afford toward their children's college
educations.
(SLD)
Reproductions supplied by EDRS are the best that can be made
from the original document.
Goals and Implementation Issues for State Prepaid Tuition
and College Savings Programs
Joan Marshall
2000
U.S. DEPARTMENT OF EDUCATION
Office of Educational Research and Improvement
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EDUCATIONAL RESOURCES INFORMATION
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received from the person or organization
Joan Casey
originating it.
Minor changes have been made to improve
o
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Points of view or opinions stated in this
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1
BEST COPY AVAILABLE
2
ISSUES FOR STATE PREPAID TUITION
GOALS AND IMPLEMENTATION
AND COLLEGE SAVINGS PROGRAMS
Joan Marshall, Maryland Prepaid College Trust*
source of student aid) was in the form of
PROGRAMS
STATE PREPAID AND COLLEGE SAVINGS
grants, with about 40 percent in the form of
the coun
are growing exponentially across
loans. This situation has now reversed, so
value,
try because they are providing real
that in the last academic year, loans made
convenience, and "peace of mind" to families who
up 59 percent of a record $68 billion in fi-
financially
are trying harder to prepare themselves
nancial aid (Levinson, 2000).
for their children's and grandchildren's college edu-
cation. While growth in participation in these plans
they
Most families today (73 percent)
say
2.
is substantial, much more consumer awareness and
are saving for their children's education and
accurate understanding of them is needed.
most consider it to be as important as saving
for retirement. However, a survey completed
in 1999 by the College Savings Plan Net-
THE GOAL
work (CSPN), an affiliate of the National
One of our hopes at the state level is that par-
Association of State Treasurers (underwrit-
Section 529
ents will soon consider participating in
ten by T1AA-CREF and BankOne), indicates
plans for future higher education costs as com-
that these families typically are not saving
monly as they enroll in 401K plans for their retire-
enough or on a regular basis. Even worse.
ment savings. Why do we seek this goal?
the most commonly used savings vehicle
indicated in the survey is passbook savings
Too many families are taking on far too much
1.
accounts (47 percent), which simply do not
as much as tens of thousands of
debtoften
keep pace with tuition inflation (College
dollarsto send their children to college.
Savings Plan Network, 1999).
There is clear evidence that families of
today's college students have generally not
saved nearly enough to cover the costs. This
WHY DO THE STATES CARE?
trend does not seem to be improving. Con-
To the extent that families are better prepared
sider the following two factors:
financially to meet higher education costs, overall
accessibility of higher education opportunities will
Tuition has been consistently rising at double
be expanded. Too often, one of the main reasons
College Board re-
the rate of inflation. The
why students elect not to attend college is because
ported recently that tuition and fees are up an
sufficient funds are not available. Clearly, increas-
col-
average of 4.4 percent at public four-year
ing the accessibility of higher education will lead
leges and 5.2 percent at private four-year col-
to a better educated workforce, which should, in
leges, while the consumer price index rose 2.7
turn, strengthen the states' economies and contrib-
percent in I 999.' To no one's surprise, loans
ute to state economic development efforts to at-
of the
are providing an ever-increasing amount
tract employers, particularly those in high tech.
extra money students need to pay these costs.
higher paying industries.
More students are taking out loans to finance
The ability of a state to increase significantly
increasing college costs and the size of those
the number of families who are better prepared to
1980 to 1995, the
loans is increasing. From
meet higher education costs should eventually re-
U.S. Department of Education's loan port-
need-based financial
lieve pressure on that
state's
folio increased from $2.2 billion to $11.5 bil-
aid requirements. While federal aid is the largest
lion.' A decade or more ago. about 60 per-
is worth noting the
source of financial aid, it
largest
cent of federal-financial aid (the
Chronicle of Higher Education's report that in
1995-1996 nearly 20 percent of full-time. full-year
'Joan Marshall is executive director of the Maryland Prepaid College
college students were receiving state financial aid.
Trust.
96
t
93RD ANNUAL CONFERENCE ON TAXATION
The Internal Revenue Code also provides very
How are We Doing?
attractive estate planning benefits that grandpar-
Network
According to the College Savings Plan
ents should consider, with payments to Section 529
either
(October 17, 2000) 65 total programs are
programs considered a completed gift for gift tax
operational or scheduled to launch:
purposes. The Code also provides five-year aver-
aging for individuals who contribute more than
prepaid tuition
states have an operational
19
$10,000 ($20,000 for married couples) in a given
program.
taxable year. Therefore, total gifts of $50,000 per
prepaid tu-
states are scheduled to launch a
3
individual ($100,000 for married couples) are al-
ition program.
lowed in one tax year without federal gift tax
operational college
states currently have an
consequences.
28
savings program.
college sav-
states are scheduled to launch a
15
IMPLEMENTATION ISSUES
ings program.
As the director of a state program, I can attest
col-
48 states have at least one prepaid tuition or
that establishing these programs and achieving
lege savings program.
broad-based acceptance is no easy task, even with
states have both a prepaid tuition program
their clear financial and tax benefits. First, the fea-
5
and a college savings program.
tures need to be clear and easy to understand for
middle income families. Again, this is no small
approximately
task given the complexities of the federal and state
As of Summer 2000, there were
value of
1.4 million accounts with a total market
legislative and regulatory environments. Second,
approximately $7.6 billion. Florida comprises
the value of these programs vs. other investment
about 40 percent of the total accounts. Eight states
options must be clear. While states have made great
New
progress in gaining broader acceptance of these
(New York, Ohio, Texas, Alabama, Michigan,
Hampshire, Pennsylvania, and Virginia) comprise
programs, there are several significant barriers to
another 34 percent, and the remaining states make
be overcome.
which are growing very
up 26 percent, many of
exist-
Consumer Awareness and Understanding
rapidly, but are too new to overtake plans in
August 2000).
States typically have limited marketing budgets.
ence for 5-10 years (CSPN,
Even with this limitation, however, advertising has
A very important point is that the most success-
the
helped improve awareness levels significantly. In
ful states, like Florida, are beginning to change
dreams
fact, CSPN found that more than half (54 percent)
culture, so that families who have college
advance
of those responding to the 1999 survey were aware
for their children readily consider saving in
Florida's pro-
of state college savings programs, and of those,
with the prepaid college program.
approximately one out of
three quarters (74 percent) had favorable impres-
gram currently enrolls
sions of the plans. I believe that, although aware-
six children in the state. The state is setting an out-
like
ness has improved, most families do not yet have
standing example for many of the rest of us,
smaller pro-
even a fairly basic understanding of how the pro-
Maryland, with younger and much
fami-
grams work. In Maryland, for example, most
grams.
lies still are not aware that the program can be used
toward tuition at private and out-of-state colleges.
Whom Do These Programs Serve?
They typically think that because the Maryland
has
The public policy goal of these programs
Prepaid College Trust is a state program, it sup-
middle in-
clearly been to appeal to families with
ports only the state's public colleges. While Mary-
least some financial
comes and higher who have at
land has a great public college system, it is just too
typically
ability to save. Prepaid tuition programs
limiting to think of where today's infant will go to
only
offer units of tuition or the ability to purchase
college to make that a reasonable limitation of the
in order to attract
one year of tuition in advance
program.
those who do not have the financial resources to
Public/private partnerships are beginning to play
college. Similarly, college
pay for all four years of
the level of
a significant role in helping improve
minimum
savings programs typically offer low
for ex-
consumer awareness. Kroger food stores,
monthly depositsas low as $15 per month.
97
NATIONAL TA* ASSOCIATION PROCEEDINGS
lege savings plan balances count as a
ample, is partnering with Pepsi and the College
Savings Plan Network to hold a contest in their
parental asset, of which a maximum of 5.64
percent annually can contribute toward
stores and affiliates across the country. Fourteen
the calculation of the expected family
lucky grand prize winners will win $10,000 each
to be invested in the state prepaid tuition or col-
contribution.
lege savings plan of their choice (CSPN, 2000). In
addition to obviously benefiting the winners, the
advertising associated with this contest alone is of
THE FUTURE
tremendous value in improving consumer aware-
I believe that the future is extremely bright for
ness of these programs.
state college savings programs and that they will
continue to grow rapidly as families accept the re-
Final Section 529 Regulations
sponsibility of paying what they can afford toward
their children's college education. Part of this
The industry is hopeful that IRS will issue final
growth will be driven by an increase in consum-
Section 529 regulations in the near future. As an
ers' understanding of the advantages of saving in
industry association, CSPN has taken the position
advance versus borrowing in the future. I believe
that there are several troublesome aspects of the
that grandparents also will increasingly take ad-
proposed regulations in use by the states. Through
CSPN testimony, meetings, and letters, we have
vantage of the estate tax benefits of these programs.
Congress, IRS, And the states will continue to fine-
communicated these concerns to IRS, and we hope
tune these programs to enhance their attractiveness.
that they will be addressed in the final regulations.
Several other factors will also contribute to the
A few of the most significant concerns include:
growth of these programs:
Transfers from one program to another
More public-private partnerships, build-
should be allowed for the same beneficiary.
ing on the success of the Kroger/Pepsi
Currently, transfers must involve a change
initiative.
of beneficiaries. CSPN has suggested a cap
of two transfers per year or eight over a
Increasing use of these programs for
lifetime.
scholarships. Florida is leading the way by
providing scholarships to disadvantaged
The dollar limit of $2,500 per year for the
youth. By purchasing prepaid tuition con-
use of "qualified education expenses" for
tracts for elementary and middle school
off-campus room and board is far too low.
students, drop out rates have been reduced
Average room and board costs for the 1999-
substantially. Students who receive these
2000 school year average $4,730 for public
"early scholarships" prepare themselves for
colleges and $5,959 for private colleges (as
college, since they know from an early age
reported by the Chronicle of Higher Educa-
tion). This change may require federal
that the financial resources are there to sup-
port them.'
legislation.
More corporate/employer involvement and
Other Federal Legislative Initiatives
assistance. These programs are ideal recruit-
Several other industry improvements require
ment and retention tools for employers in a
action by Congress:
highly competitive labor market. And what
about a 529 match as an employee benefit?
Adding "cousin" to the list of eligible rela-
tives to whom benefits may be transferred;
Notes
Allowing earnings to be completely tax
exempt at the federal level, instead of being
Arlene Levinson, "College Board Survey Finds Col-
'
lege Costs Still Rising Faster than Inflation," Associ-
taxed at the beneficiary's tax rate.
ated Press, October 17, 2000.
Correcting the disparity in financial aid
2 South Carolina Tuition Prepayment Program, 2000 En-
treatment, whereby 100 percent of benefits
rollment Booklet.
from prepaid tuition programs may be added
Florida Prepaid College Foundation, 1999-2000 An-
to a family's expected contribution, but col-
nual Report.
98
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