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

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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 PERMISSION TO REPRODUCE AND EDUCATIONAL RESOURCES INFORMATION DISSEMINATE THIS MATERIAL HAS CENTER (ERIC) BEEN GRANTED BY 1 This document has been reproduced as received from the person or organization Joan Casey originating it. Minor changes have been made to improve o reproduction quality TO THE EDUCATIONAL RESOURCES INFORMATION CENTER (ERIC) Points of view or opinions stated in this document do not necessarily represent official OERI position or policy. 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 ,ULI.G4.GVU3 I IV I of Education as..Deparenent onice of Eduostlonal Research and Impluverimint PERO ERTC National Library ot Education (NLE) EduoatIon01 Resources Wort-neon Cent*. (ERIC) REPRODUCTION REL4EASE (Specific Document) I. DOCUMENT IDENTIFICATION: ord tryv. 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