Tuition costs fueling boom in college savings

State-sponsored plans draw billions of dollars

Dollars & Sense

November 18, 2001|By BLOOMBERG NEWS

BOSTON - Rising tuition costs are fueling growth in state-sponsored U.S. college savings plans, according to a new report.

U.S. families will have saved about $21.8 billion this year through savings plans, prepaid plans and other programs to pay for post-secondary school education, Boston-based consultants Cerulli Associates said last week. That's expected to grow to more than $100.7 billion in five years.

U.S. families saving for a baby born in 2001 need to accumulate almost $245,000 to cover the cost of sending their child to a private college for four years, the report said, citing the College Board. Tuition growth has outpaced growth in household income by more than fivefold since 1980, spurring the demand for tax-deferred savings plans, the report said.

"As more parents become aware of the tax benefits available for college savings, demand is expected to strengthen," co-authors Lisa Baird and Peter Starr said.

Cerulli also noted that college savings plans will become more attractive because of a tax relief package passed earlier this year by Congress that allows for tax-free distributions from so-called 529 plans beginning next year.

State-operated 529 plans, tax-deferred savings accounts for post-secondary school education, are expected to grow to more than $51 billion in five years from an estimated $7.2 billion by year's end in 2001, the report said.

Coverdell education savings accounts, formerly education IRAs, are likely to grow to $33 billion over the same period from about $5 billion in 2001, the report said.

Three firms, TIAA-CREF, Fidelity Investments and Merrill Lynch & Co., dominate the market in managing 529 plans for states, the report said.

TIAA-CREF leads in states, with 12. It has accumulated almost $950 million in plan assets. Fidelity is No. 2 with three states and more than $803 million. Merrill is next, with $456 million.

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