State offers 2 ways to help pay for college

Shaky stock market turns parents toward savings programs

Tax advantages stressed

Recent deposits show IRS-approved plans growing more popular

April 21, 2002|By JoAnne C. Broadwater | JoAnne C. Broadwater,SPECIAL TO THE SUN

Despite jitters about the stock market, Maryland's new college savings investment program is riding a wave of families eager to set aside money for education and reap tax benefits at the same time.

The Maryland College Investment Plan, begun with great fanfare in December, had pulled in $114 million by the end of February, representing about 32,000 individual accounts. That's up from 27,000 accounts as of year's end, as account holders rushed to make deposits before the end of the tax year.

And the state's original college savings plan -- the Maryland Prepaid College Trust, which lets families buy tomorrow's tuition at today's prices -- is booming as well, having ended its fifth enrollment period March 22 with more than 4,000 new accounts.

"There has been a lot of excitement and enthusiasm and a very high level of interest in these plans," said Joan Marshall, executive director of the Maryland Prepaid College Trust, which administers the two types of accounts. "We are really gratified at the tremendous growth."

That interest is reflected nationwide, as families pour money into savings plans established under Section 529 of the Internal Revenue Code, which offers certain tax benefits.

The tax-advantaged plans fall into two categories: prepaid tuition arrangements, which let participants secure one or more years of tuition at current rates; and managed investment accounts, which can be used for room, board, books and other expenses in addition to tuition and fees.

Nationwide, there were 2.6 million accounts of both types as of year's end, representing $15 billion in savings -- up nearly $6 billion from the year before, said Chris Hunter, program manager for the College Savings Plans Network, a clearinghouse for information on the plans.

"More people are becoming aware of 529 plans," said Hunter. He said that while the new investment plans are drawing intense interest, there has also been a resurgence of interest in prepaid plans in the last 12 to 18 months. He attributed that to concerns over the economy.

Maryland is among about 20 states that offer both types of 529 plans.

New this year is a federal tax exemption on investment earnings used for higher education. Marylanders also receive a state tax exemption on such earnings, as well as a state tax deduction on deposits into 529 plans. Under a bill passed by the legislature, that deduction has been limited to $2,500 per account holder for each beneficiary.

Maryland established its prepaid tuition plan in 1997. It allows the payment of future college tuition and fees at any two- or four-year Maryland public college or university at today's prices. Participants can contribute lump-sum payments or take part in several installment plans. The state has taken steps to ensure that money will be available for the students when they need it.

If the student goes to an out-of-state or private college, the prepaid plan will pay an amount equal to the weighted average of Maryland public college tuition and fees, which takes into consideration the number of in-state, full-time students at state institutions.

With the uncertain economy -- and Maryland public college tuition rising an average of 4 percent a year -- that plan is drawing strong interest, Marshall said. The prepaid plan now has more than 14,000 accounts, with assets in excess of $80 million, according to plan administrators.

Karen Jacobsen, 43, and her husband, Peter, 42, enrolled in the prepaid trust several years ago and make annual payments of $2,500 to $2,800 per child into accounts for their children -- Russell, 11, Matthew, 8, and Natalie, 6.

The Annapolis couple like the prepaid trust because of the sense of security it gives them and the tax benefits. They are thinking about opening accounts in the investment plan.

"We're investing now for the future," Karen Jacobsen said. "Having a solid education is a good foundation for getting ahead in life."

The investment savings plan is managed by T. Rowe Price. The accounts can be opened year-round with a $250 minimum or automatic monthly deposits of as little as $25. With 10 investment options, consumers can select one that fits their preferences in terms of risk and return, Marshall said.

For many, Marshall said, the fear of rising college costs -- and of doing nothing -- outweighs the fear of investing in an uncertain market. The tax benefits help soothe concerns, she said.

"We think that it makes a lot of sense to invest in both Maryland 529 plans," she said.

David Gorelick and his wife, Naomi Feldman, agree. They opened prepaid accounts for their three youngest children in 2000. And when Maryland started its new investment plan, the Baltimore County couple decided to open three more accounts for Judith, 15, Gabriel, 12, and Jacob, 9, as well as for 18-year-old Sarah, who is already in college.

"You've got to start thinking about paying for college when you're in the hospital with the baby," Gorelick said.

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