New law makes saving for college easier

University to set up program that offers tax breaks for college funds

Posted: Thursday, March 16, 2000

Parents will soon have a new way to save money for their kids' college education.

Gov. Tony Knowles signed a bill into law Wednesday that lets Alaskans take advantage of federal tax breaks when saving for school.

``The intent was to create a savings program that would be more effective for Alaskans to save for their college education,'' said Jim Lynch, vice president of finance for the University of Alaska. ``It will work very much like a mutual fund program.''

The university will be responsible for setting up the program. Lynch said it will take a few months to put the law into effect, but he hopes it's in place by year end.

Senate Bill 186, sponsored by Anchorage Republican Sen. Tim Kelly, passed both houses of the Legislature unanimously. Anchorage Republican Rep. Lisa Murkowski sponsored a similar measure in the House.

The new law allows Alaskans to take advantage of a 1996 change in the federal tax code. Participants will set up an account with the state program for a particular beneficiary - a child, grandchild or even themselves, for instance.

``Then they can just send money in monthly or quarterly or annually or do it at Christmas or whenever they choose,'' Lynch said.

They can put off paying taxes on the money earned on the investment until the money is actually pulled out to pay for school - perhaps 15 or 20 years later.

``That difference can be significant,'' Lynch said. ``The money that would otherwise go to taxes gets invested for 15 years.''

When the money is used, the taxes would be paid at the rate owed by the student, which could be much lower than a parent's tax rate.

The law also allows parents, grandparents or others to put as much as $50,000 in one year into a person's education savings account without the money being subject to federal gift taxes. And it protects money in the account from being used to satisfy creditors in the event of bankruptcy.

Alaskans would not be able to receive the tax benefits of the 1996 change in federal law without such a state program.

``You have to put it into a qualified state higher education savings program,'' Lynch said. About 40 states either have set up the programs or are in the process of doing so, he said.

Robert Conte, a local financial planner, said the program will add to the options for parents saving money for their children's education.

``Individuals are always concerned about that (saving for education), especially when the cost of education rises at twice the level of normal inflation,'' he said.

Of course, putting money into the state program, rather than some other type of account, comes with restrictions. The money can be used only for education. If it isn't, there will be a penalty. Most states have set that at about 10 percent of the earnings, Lynch said.

However, the funds could be transferred to another family member if one child doesn't go to college.

The program shouldn't cost the state any money, Lynch said, because administrative fees charged to participants should cover its costs.

The state will contract with a mutual fund provider to do the record-keeping and invest the money.

The state already has an advance college tuition program, which allows people to buy tuition credits now that can be used in future years at University of Alaska campuses. That allows parents to avoid the inflationary cost of education.

The drawback of that program is that if the credits aren't used at the University of Alaska, they may not be worth as much. Also, that program only addresses tuition costs, not the cost of room and board for a college student, Lynch said.

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