Investing for college future made easier
September 29, 1999
Beginning Oct. 19, Colorado will be the first state in the nation to offer a choice of money savings programs for college-bound students.
The program, CollegeInvest, is qualified under Internal Revenue Service Code 529 and will combine two programs, the Prepaid Tuition Fund and Scholars Choice.
CollegeInvest allows investors to reap tax benefits. The State of Colorado does not tax the investments and the federal government has a way of showing its support for the program.
“They offer tax benefits as the investments are federally tax deferred until the student uses the money,” said CollegeInvest Chief Information Officer Jim Chavez.
This means families may start saving for college as soon as a child is born and will not pay any taxes on the gains of the investment until the child uses the money to pay for college. In a traditional, non-educational investment, interest must be paid as soon as any gain is made.
Money invested in either CollegeInvest program may be used throughout the United States at private and public colleges, universities and vocational schools. According to Chavez, money can be used at any school eligible to participate in the Federal Financial Aid Assistance Program.
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Investments may be used at Colorado Northwestern Community College (CNCC) campuses.
Families have the option of investing in either or both plans and may choose to use the funds for different types of college savings.
“CollegeInvest is a broad program that includes options for families saving for college,” Chavez said. “There are different types of investments for the different needs of families.”
According to Chavez, the Scholars Choice plan will grow as the market grows. Investors in CollegeInvest choosing Scholars Choice may choose from three options. An “age-based” option guides the investment through a sequence of seven portfolios where the investment mix is based on the age of the student. As the child grows, these portfolios are more heavily invested in equity mutual funds, offering a more aggressive mix, with a gradual move toward bond or money market mutual funds.
A second option, similar to the age-based option, “adult-students” may invest toward their own future college education. Whether they are beginning or resuming college studies, older students may take advantage of this plan to assure themselves of proper funding upon entering a school.
The final option is a “balanced” fund that offers the same investment mix for all participants regardless of age. This fund will be based on using 50 percent in equity securities and 50 percent in fixed income securities and cash.
Investments into Scholars Choice may be made any time and the minimum initial investment is $50. After the initial investment, the minimum to invest is $15.
In Scholars Choice, only the account owner may make contributions to the existing account. Managing these investments is Salomon Smith Barney with approval of the Colorado Student Obligation Bond Authority.
PREPAID TUITION FUND
According to Chavez, the Prepaid Tuition Fund is based on average tuition inflation at Colorado public colleges and universities. Investors purchase average tuition based on current costs and the investment is designed to pay out at the average price of tuition in the year the student uses it for college expenses.
The Prepaid Tuition Fund began in 1997 and more than 11,000 children have been enrolled in the fund, resulting in more than $95 million committed toward future college expenses.
Unlike the Scholars Choice fund, the Prepaid Tuition Fund requires enrollment in the program between Oct. 19, 1999, through Jan. 11, 2000. After these dates, investors are unable to invest any more money into the fund until the next enrollment dates.
A minimum initial investment of $25 is required for the Prepaid Tuition Fund, but a lump sum of $1,000 may be invested and nothing more needs to be put in.
In this fund, anyone may give a gift contribution to an existing account in any amount at any time. The Colorado Student Obligation Bond Authority administers the Prepaid Tuition Fund.
CollegeInvest is different from an educational individual retirement account (IRA) in that it is not limited to only $500 per year. With CollegeInvest, investments may be made up until the fund reaches $150,000.
In terms of taxes, at the time when funds are used for education, the value of the investment is assessed at the student’s (not the investor’s) rate which will be a considerably less tax burden, according to Chavez.
Investments made are dedicated to education and may be transferred to different family members of the student. Money may be used to pay for tuition, fees, room and board, and books and supplies and anyone is eligible to invest.
Money may be withdrawn from the Prepaid Tuition Fund at any time after the First Payout Date selected on the contract and with Scholars Choice, money may be withdrawn at any time. If the money withdrawn is not used for approved college costs, there is a federally required 10 percent penalty on the increase in the value of the investment.
According to Chavez, there are two better options than simply taking the money out and not using it for higher education. One of the options is to leave the money in the fund for future years as it will continue to grow, tax deferred. The other option is to transfer the investment to a different sibling.
Upon filling out applications for CollegeInvest, families must claim a beneficiary and decide which fund to invest in Prepaid Tuition, Scholars Choice or both.
According to Chavez, setting up the account is simple and straightforward. To receive information on CollegeInvest funds, call (800) 478-5651 to be placed on the mailing list or visit the Web site at CollegeInvest.org.
“CollegeInvest is very easy to understand and accessible to everyone,” Chavez said.