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June 2004
Education Funding: Helping Employees Save for Their Kids’ College
By Leslie Smith
 When the economy begins to recover, many employers will once again search
for ways to attract and retain valuable employees. A 529 plan can be a great
benefit to your employees. Like a 401(k) retirement plan, a 529 college savings
plan is a convenient, automatic, and tax-advantaged way to save for education
that can be established individually or through an employer.
Why Help Employees Save?
College graduates earn on average 80% more than high school graduates, which
can add up to more than $1 million over a working life.1 According
to a study by the National Center for Education Statistics, 93% of parents
expect
their
kids to go to college. If your employees are parents, there’s a good
chance they’re included in this number. However, this same 2001 study
found that only half of all families are prepared for how expensive college
will be. While saving for retirement is arguably the first priority, saving
for college is high on the list.
How Expensive Is College?
Projections vary. However, The College Board, 2002, estimated the average cost
of a four-year, private college to be $100,208 in 2003. Based on a 5% inflation
rate, The College Board projects the average private college to cost $241,163
in 2021, when babies born in 2003 will start college. Even if your employees
decide against private education due to the expense, the expected cost of
a public institution in 2021 is $93,021, up from $38,652 in 2003—an
amount most employees would still consider significant.
What Is a 529 Plan?
Although Congress first authorized 529 plans in 1996, many people are still
unfamiliar with what they are and how they work. To make matters more confusing,
the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made
significant changes to 529 plans. A 529 plan is a tax-advantaged way to save
for a wide range of college expenses, including tuition, room, board, and
other qualified expenses at any college in the United States.2 Anyone can
open an account, and anyone can contribute. An employer, in conjunction with
a plan sponsor, can offer automatic payroll deductions through the company
payroll, giving employees access, ease of use, and a wide range of investment
options.
Who Controls the Account?
When someone establishes a 529 account, they’re required to name a beneficiary,
usually their child or another family member’s child, such as a niece,
nephew, grandchild, or other qualified family member.3 If
the designated beneficiary decides not to attend college, then the account
owner can name
a new beneficiary.
The account owner retains control of the 529 assets. They can leave them invested
in the account for later use, name a new beneficiary, or even withdraw the
assets.2
What Are the Tax Benefits?
When Congress authorized 529 plans in 1996, the earnings in a plan were simply
tax deferred. In 2001, tax benefits increased with the passage of EGTRRA.
Currently, there are no federal income taxes on withdrawals used for qualified,
higher-education expenses (state taxes may apply). Congress passed this
as a temporary provision until December 31, 2010, but may extend it later.
It’s
always a good idea to consult your tax advisor regarding matters of taxation
specific to your situation.
Many states have state-sponsored 529 plans that offer state tax benefits in
addition to the federal tax benefits mentioned. Tax benefits offered by a state
plan are just one of the factors to consider when selecting a 529 plan. No
matter what state your employees reside in, most state plans are available
to investors from other states. An out-of-state plan with lower operating expenses
may offer your employees more benefits overall than an in-state plan.
What About Financial Aid and Student Loans?
One of the tenants of most financial advisors is a no-debt philosophy, or having
only “good debt,” such as a home mortgage. However, as college
costs escalate and the gap between saving for college and paying for college
widens, more students than ever are entering the job market with higher debt—thus
making the dream of home ownership a little more out of reach.
- 64% of full-time
undergraduates rely on student loans.4
- The
average undergraduate student debt is $18,900, a number that has
increased every year.4
- The average grant is only
$4,900 and is getting smaller every year.4
Summary
In a competitive business environment, employee benefits that attract and retain
employees can be of immeasurable value. While a retirement plan is usually
the first priority in terms of added value, statistics show that paying for
college is a priority and a concern among employees. A 529 plan is a convenient
and automatic way to support your employees’ financial goals, often
at a substantial savings to them and very little cost to you.
1 Source: The College Board, 2002. Assumes a 5% inflation
rate.
2 State taxes may apply. Federal tax-free treatment expires on 12/31/10 unless
extended by Congress. Nonqualified withdrawals are subject to regular income
tax and an additional 10% penalty tax.
3 Refer to specific 529 plan documents for a definition of qualified family
member.
4 Source: U.S. Dept of Education, National Center for Education Statistics,
Nellie Mae, “College on Credit: How Borrowers Perceive their Education
Debt,” 2002. State PIRG’s Higher Education Project, 2000.
Leslie Smith is an independent financial advisor who has provided family protection
and wealth-building strategies for nearly 20 years. She holds five professional
licenses through the National Association of Securities Dealers and also maintains
a California insurance license. Her areas of expertise include retirement planning,
investment planning, asset management, life insurance, disability insurance,
and estate and college planning. Prior to becoming an independent financial
advisor, she was a vice president of investment with BankAmerica Investment
Services. For more information, call Leslie at 650-571-8132. To read more articles
written by her, visit the WIC Website.
Securities offered through SunAmerica Securities, Inc./AIG Advisor Group,
a registered broker-dealer. Member NASD/SIPC.
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