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 October 22, 1999

Plan new effective way to save for college

Parents, grandparents and even godparents soon will have a new way to save for a child’s college education. Commencing this month, the state of Colorado will offer its new College Savings Plan in partnership with a major financial institution. The plan itself makes an excellent case study for a college-level course on how to effectively manage your personal finances.

As your state treasurer, I designed the College Savings Plan to provide those with college-bound children with a savings option that combines market-based returns with substantial tax advantages. Here is how it works:

The state will contract with a major financial institution to operate the plan. This institution will promote the plan, perform all the record keeping and manage the investments.

The account owner — a parent, grandparent, etc. — will open an account in the name of the beneficiary (child) for whom he or she wishes to provide an education. The account owner will have a choice of two funds. The first is a balanced fund with half of the proceeds invested in equities (stocks) and the other half in fixed-income securities (bonds). The second is an age-based fund with the mix shifting from a predominance of equities and minimal fixed-income investments to a portfolio primarily made up of fixed-income securities as the child grows closer to college age.

Opening accounts should prove quite easy. Initially, those interested will call directly to the financial institution. As the program is implemented, financial planners and brokers also will have the ability to enroll participants. Account owners will have the ability to make lump sum contributions when they so choose or have regular contributions deducted from their bank accounts or payroll.

Account owners will receive regular statements showing their contributions and the performance of the fund they have selected.

Not only are the plan’s mechanics simple to understand and saver-friendly, the plan itself provides the account owner and the beneficiary with two essential advantages. The first of these is significant tax advantages. Once funds are deposited in the plan, they accumulate on a tax-deferred basis.

When the funds are withdrawn, they may pay for qualified expenses: tuition, room, board and fees. At the time of withdrawal, the money is taxed by the federal government at the student’s tax rate and exempt from any Colorado state taxes. The second advantage is the ability of these funds to earn market-based returns. Although the market does not go up every year, on average, these investments should outperform other savings vehicles.

The Colorado Student Obligation Bond Authority, which operates the existing PrePaid Tuition Fund, will administer the contract for the College Savings Program with the financial institution. The two plans do have some similarities. These similarities include penalties for unqualified withdrawals, the tax advantages and the absence of a guarantee by the state of Colorado.

The key difference between the two plans is that investment returns in the PrePaid Plan are tied to the rate of tuition increases at public universities in Colorado. These tuition increases are limited by the Legislature, which subsidizes tuition rates. In the past two years, for example, tuition rate increases in Colorado were just 1.3 and 2.6 percent. Since tuition increases for private colleges and out-of-state universities increase at about 7.5 percent per year, investments in the PrePaid Plan may not provide sufficient funds to pay for an education if you do not use Colorado’s public universities.

Saving for a child’s college education is one of the most difficult challenges most parents face when raising their children. All too often college is either just too expensive and a child is unable to attend or the child completes college with a degree and a staggering debt load. This plan will help those who think ahead prepare for a child’s education. I hope everyone with college-bound children will take advantage of this outstanding new opportunity.

Mike Coffman is the state treasurer for Colorado

Parents, grandparents and even godparents soon will have a new way to save for a child’s college education. Commencing this month, the state of Colorado will offer its new College Savings Plan in partnership with a major financial institution. The plan itself makes an excellent case study for a college-level course on how to effectively manage your personal finances.

As your state treasurer, I designed the College Savings Plan to provide those with college-bound children with a savings option that combines market-based returns with substantial tax advantages. Here is how it works:

The state will contract with a major financial institution…

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