Tax-friendly plans help you save for college


May 07, 2000|By EILEEN AMBROSE

First comes love, then comes marriage. Then, what the schoolyard rhyme doesn't tell you, comes perhaps a baby with some hefty future college bills.

Fortunately for parents, grandparents and others wanting to give students a helping hand, more states are coming out with tax-friendly plans to save for college.

These so-called 529 plans come in two forms. Some allow you to prepay tuition, essentially locking in tomorrow's tuition based on today's prices.

The other type, college savings plans, work sort of like a 401(k), where you make regular contributions and the eventual balance depends on how much you put in and the investment performance.

Maryland may soon offer both.

The state has been accepting enrollment in its prepaid tuition plan - available only to Maryland and District of Columbia residents - for two years and has 5,500 participants, far below original projections. This year, legislators agreed to revisions to attract greater participation. They've added a financial guaranty to the prepaid program and approved the creation of a savings plan.

The governor is expected to sign the legislation next week.

Financial experts recommend that parents check out their own state's program as well as other states' college savings plans to weigh which option best fits them. The plans, experts say, can go a long way to getting a handle on the rising cost of college.

In Maryland, tuition and fees this year at four-year public schools ranged from $3,272 at Coppin State College to $7,175 at Saint Mary's College of Maryland. Tuition and fees at private schools this year went as high as $24,160 at the Johns Hopkins University.

By the time an infant today reaches 18, tuition and fees are projected to total $64,571 for four years at a Maryland public school.

By offering two types of plans, Maryland officials hope to cater to both those who crave security and those who can handle more risk and want potentially higher returns.

"Some want to have the peace of mind that their tuition is paid for, no matter how high it can go in the future," said Joseph Hurley, an accountant and 529 plan expert in Pittsford, N.Y. "For them, prepaid tuition contracts will still be an attractive deal."

Under Maryland's prepaid tuition plan, you can buy a contract that will pay full tuition and fees at a Maryland public four-year college or two-year community college. Children choosing a private school or education out of state will receive benefits tied to tuition at Maryland's public colleges.

You can pay via lump sum or through various installment plans. Most recently, a contract for four years at a public college for an infant costs a lump sum of $17,788 or $156 per month until the child reaches college age.

The program offers state and federal tax benefits. For example, you can deduct contract payments, up to $2,500 per contract, each year on your state tax return.

Also, the money in the program grows tax-deferred until the student enters college and benefits are paid. At that time, the gains are federally taxed at the child's income tax rate, usually 15 percent. No Maryland taxes are owed.

If the child doesn't go to college, the tuition can be transferred to a relative of the child. You also can get a full refund of payments, although you will forfeit all or half the earnings, depending on when the contract is canceled.

Remember that the plan only covers tuition and fees, and students will still have books, transportation, room and board and other costs that can be sizable, said Mari Adam, a financial planner in Boca Raton, Fla. "Don't just assume you're done. That's a common misperception," she said.

So far, families have been reluctant to enroll, largely because the prepaid program lacked a state guarantee that enough money would be available when their children go to college, said Joan Marshall, executive director of the Maryland Prepaid College Trust.

She expects that to change now that legislators agreed to add a "statutory" guarantee, like the one offered in Virginia's popular plan. If tuition rises faster or the program's earnings are less than expected, the governor must cover the shortfall in the budget, Marshall said. Though legislators can opt not to fund it, that would be "politically risky" and not likely to happen, she said.

Baltimore developer Sylvan Cornblatt bought tuition contracts for his four grandchildren, ages 2 to 11. The 62-year-old said it was seeing out-of-state college costs totaling $31,000 for his son a few years ago that convinced him to lock in tuition.

"God knows how high the tuition will be by the time they get to school," said Cornblatt, who is paying about $1,300 a month for five years on the contracts.

Cornblatt says his sons would prefer that he invest the money in the stock market, but with the recent market gyrations he's content with his choice. "My primary goal is to have their tuition paid in college, not to make a profit," he said. "It takes the mystery out of it."

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