Few worries gnaw on a parent like the prospect of putting a child through college. Tuition is rising faster than the nation’s inflation rate, and the yearly cost of a higher education now drains 25% of the median family income.
With financial aid limited, more and more college students are graduating not just with degrees but with mammoth loans needed to cover their Mt. Everest-sized bills.
In the state Capitol this spring, there is a movement afoot to lend families a hand. Two competing proposals before the Legislature would offer parents a chance to get a jump on college costs through tax-free investments in state-run savings plans.
One proposal, by state Sen. Tom Hayden (D-Los Angeles), is a tuition prepayment plan that allows parents to lock in tomorrow’s college education at a state college or university at today’s prices. The program includes a guarantee that all tuition costs will be covered, regardless of how high fees rise.
The other approach, by Assemblyman Brooks Firestone (R-Los Olivos), is more like a standard savings account, permitting parents to save at whatever rate they choose toward the goal of financing a college education. Absent from Firestone’s plan is a state promise that a family’s investment will be sufficient to cover future tuition costs.
Both programs rely on a common financial strategy, pooling families’ payments to obtain a higher rate of return than an individual investor could achieve. The accounts would be exempt from state taxes and subject to federal taxes only when the beneficiary taps the fund to enroll in school.
California is a latecomer to the concept of state-run layaway plans for college. Twenty states already have a plan on the books, and nearly every other state has a program in the works.
Florida’s is by far the most successful, with one in nine eligible schoolchildren now the owner of a prepaid tuition account. Under the program, launched in 1988, parents of a newborn can pay $48 a month for 17 years and have tuition at one of Florida’s 10 state universities fully covered by the time the child moves into the dorms.
“These programs are hugely popular, because states are realizing that they are just good public policy,” said Pam Taylor, director of the National Assn. of State Treasurers, which recently completed a survey of state-run college savings plans. “It makes sense to get parents into the savings mode early rather than have students graduate and be shackled to this enormous debt.”
Earlier Bills Failed
Hayden has been pushing the prepaid tuition concept in California since 1989, but his proposals have either been killed by governors’ vetoes or perished in the Legislature. Gov. Pete Wilson rejected one in 1991, arguing that parents can use other vehicles–such as tax-free U.S. savings bonds–to squirrel away money for college costs.
Wilson also fretted that there is no guarantee earnings on the program’s investments would keep pace with rising tuition costs. In the event they did not, parents might look to the state’s general fund for a bailout, said Wilson, who has yet to reveal his position on this year’s bills.
Hayden said the experience of other states proves the governor’s fear to be unfounded, and experts confirm his assessment. They say all the programs have remained solvent.
“It’s a red herring,” said William Montjoy, an executive with InTuition Inc., a company hired by states to manage college savings programs. “Sure, you’ll have down years, but they even out with the up years. . . . These are programs managed over the long term and the fact is they have all been sound.”
Despite the hostile reception given Hayden’s bills in the past, this year California legislators–Democrats and Republicans alike–appear gleeful at the prospect of doing something for parents of college-bound youth. Firestone’s bill has 47 co-authors, Hayden’s has 12. There is little doubt that some form of legislation–perhaps both bills, perhaps a compromise–will pass the Legislature this year.
Government college assistance–of a more immediate nature–is also on the front burner in Washington.
Under a budget deal between President Clinton and congressional Republicans, $35 billion in tax cuts for higher education would be provided for individuals and families over the next five years. The expenditures would probably take the form of tax cuts and tax deductions.
All of the political movement is good news to the California Student Aid Commission, which supplies financial assistance for college students and, along with both state university systems, backs Firestone’s bill.
“We consider this a matter of urgency,” said Dana Callihan, deputy director of the commission. “A great number of states have led the way on this and California has danced around the issue for years. Now is the time to take action.”
Few parents would disagree because the financial reality they face has become increasingly grim.
College Board figures show tuitions are rising faster than the nation’s inflation rate. By 2012, total expenses for four years at a private university will be $268,000, some analysts predict, although at least some private colleges offer financial incentives that can reduce the bill for students they wish to attract. The estimated cost at a public university: $128,000.
Meanwhile, federal grants for middle-income families have dwindled dramatically, meaning students have been forced to rely on loans. Borrowing in the federal loan programs doubled between 1990 and 1996, increasing annual student debt by $1.5 billion. In the 1995-96 school year, college students borrowed $50.3 billion, up $3.3 billion from the previous year.
Such circumstances have made state-run college savings programs a big hit with the public. Michigan pioneered the idea in 1986, but the real boom has come in the 1990s, as lingering tax questions have been resolved.
Most of the programs resemble the Hayden prepaid tuition model, and they enjoy the highest participation rates. Many of the others follow Firestone’s approach.
The programs have blossomed during the booming stock market of the 1990s and the recent strong national economy. They have yet to weather a years-long downward cycle and plummeting investment returns.
While a few states were hindered by tax problems early on, only one program–Wyoming’s–has faltered, due to sluggish participation.
Proposals Are Similar
The two proposals on the table in California are similar in many respects:
* They apply only to tuition and mandatory fees. Excluded are room and board, transportation and other expenses that can add up to more than half the cost of a college education.
* Those contributing to the accounts would pay no state or federal taxes on the invested funds. Once the account is tapped, federal taxes would be assessed for the beneficiary–who, as a student, would probably be in a low tax bracket. Legislation pending in Congress would improve the tax picture still further, making the accounts completely tax-free.
* Both programs are aimed at financing an education at a public college or university in California. But the benefits accrued under the savings programs can be applied toward any accredited school, in or out of the state.
* The accounts can be opened by a parent, grandparent or other contributor, and investments may be made in a lump sum or through regular installments.
* A participant may withdraw from the program at any time and receive a full refund, plus interest. If the withdrawal is due to any reason other than death, disability or receipt of a scholarship, an administrative fee is assessed.
* Both programs follow a conservative investment strategy and require an annual audit to ensure fiscal solvency.
The key difference is what the programs promise. Under Firestone’s plan, a participant can choose a range of options and can alter how much is invested, depending on family income flow and other factors.
“There is a lot of flexibility,” Firestone said. “If the Rotary Club gives you a scholarship of $10,000, you can throw that in there. You don’t have to calculate a specific tuition amount and stick to a prescribed monthly schedule.”
Hayden’s option carries the appeal of a state guarantee to parents that if they honor their contract and follow through with payments, their child’s tuition at a state college or university will be covered.
That promise is based on the assumption that earnings on the pooled investments will make up the difference between the cost of an education today and the cost of that same education tomorrow.
In Florida, that assumption so far has been proven correct. Florida’s fund has a market value of $1.3 billion and a surplus of $206 million.
“We’re in our 10th year, and I can say with some authority that this is a program that works,” said Stanley Tate, a Republican businessman and chairman of the board that oversees the Florida program. “If you want to make college accessible and affordable, this is the way to go.”
Hayden, who is making his fourth attempt to get the program signed into law, expressed confidence that some sort of savings plan will clear the Legislature. While both Hayden and Firestone say they are willing to talk compromise, Hayden insists that a state guarantee is essential to the program’s success.
“A guarantee establishes a sense of security so that parents can send a message to their son or daughter, telling them, ‘You will be able to afford college if you study,’ ” Hayden said. “Without a guarantee, you could get a lot of angry parents who have saved and saved and still won’t be able to cover the bill when the times comes.”
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Paying for College
The California Legislature is considering creating state-run college savings plans that would allow parents to pool their money with other parents in a large investment account to pay for their children’s tuition. Here are the 20 other states with similar programs:
Alabama
Alaska
Arizona
Colorado
Florida
Indiana
Kentucky
Louisiana
Maryland
Massachusetts
Michigan
Mississippi
Ohio
Pennsylvania
Tennessee
Texas
Utah
Virginia
Wisconsin
Wyoming
Source: National Assn. of State Treasurers
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Borrowing for College on the Upswing
With tuition costs on the rise and grants declining, more students are using loans to finance their educations.
* Borrowing has risen sharply in all segments except vocational and trade schools, with the largest percentage increases at the UC and Cal State systems and the largest dollar increases at private universities.
* Borrowing in the federal loan programs doubled between 1990 and 1996, increasing annual student debt by $1.5 billion.
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Factors Behind the Surge in Borrowing
* Since 1990, the cost of attending an independent college in California increased 29%–from $18,886 to an estimated $24,350 this year. Costs at University of California campuses increased from $9,398 to $12,884, or 37%. Costs at California State University campuses increased from $8,498 to $10,657.
* The median income of families with students attending four-year California colleges declined between 1990 and 1996.
* On the basis of need, more students eligible for aid, but the largest source of additional aid is loans.
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Borrowing 1990-91 (Total: $1.2 billion)
California Student Aid Commission: 87%
Loan Agencies Outside California: 13%
U.S. Dept. of Education: 0%
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Borrowing 1996-97 (Estimated total: $2.7 billion)
California Student Aid Commission: 50%
U.S. Dept. of Education: 30%
Loan Agencies Outside California: 21%
Source: California Student Aid Commission. 1997 figures.