Feeding the college piggybank
How would you like to earn money for your child’s college education just by buying some groceries?
Under an agreement with Upromise Inc., a national college savings administrator, College Savings Iowa participants can earn rebates of up to 3 percent that are directed to their college savings accounts by buying selected items and paying with their credit cards at participating grocery stores.
The deal is just an added benefit of Upromise, which assumed the bookkeeping duties for Iowa’s plan in May.
“This is just a nice perk that’s going to help people save for college,” said State Treasurer Michael Fitzgerald, who wants more residents to take advantage of the state-sponsored college savings plan.
Established by the Legislature in 1998, College Savings Iowa has grown to more than $802 million in investments, fueled largely by out-of-state investors who hold about three-fourths of the total dollar amount invested in some 92,000 accounts.
Among state residents, “we get the word out as best we can,” said Fitzgerald, who last week was at a booth at the Iowa State Fair promoting the plan. “Being a state official I try getting around the state, and it’s one of the points I try to get across.”
Iowa residents have access to one of the lowest-cost, best-managed college savings plans in the country, Fitzgerald said, with the added advantage that they can deduct up to $2,290 of the amount they invest this year from their state income tax liability. Managed by the Vanguard Group, the plan offers 12 fund choices with varying degrees of risk and return.
In 2002 and again in 2003, College Savings Iowa was named among the top college savings plans in the country by Money magazine, which has helped it attract more than $200 million in additional investments in the past year.
“In the national advertising for college savings plans, Iowa’s always right up there, because it’s cheap, simple and professionally managed,” Fitzgerald said. “That’s the main reason it does so well.”
In May, Fitzgerald’s office completed a competitive bid process and contracted with Upromise to administer the Iowa plan. The Massachussetts-based company, which manages similar programs for Nevada’s and New York’s college savings plans, administers over $4 billion in college investments.
“I think it’s kind of a win-win situation for both sides,” said Bernie McNamara, vice president of Upromise Investments Inc., Upromise’s broker-dealer affiliate. “For example, (last) week we have a presence at the Iowa State Fair, with a booth next to College Savings Iowa. There is kind of a nice symbiosis between the state’s efforts from a public policy perspective and this kind of grassroots effort to get people thinking about saving for college.”
In addition to keeping the books for Iowa’s program, Upromise has enrolled about 25,000 Iowa residents in its “loyalty program” for earning rebates on grocery and retail purchases. More than 130 grocery stores in the state are participating, including Hy-Vee, Econofoods, Jewell-Osco and some Albertson’s stores. Other retailers offering rebates include AAMCO Transmissions, Safelite AutoGlass and Bed, Bath & Beyond.
In the three years it has been conducting the rebate program, 5 million people nationally have enrolled and so far have earned $170 million in rebates. Though college savings is the intent of the program, participants can receive a rebate check rather than having their account balances transferred to college savings plans, McNamara said.
Other changes to College Savings Iowa should encourage even more families to begin saving, Fitzgerald said. Until recently, the plan included an age restriction that required the child to be 17 or younger for someone to open an account for them.
“We had a lot of calls from people saying, ‘My kid just started college; why shouldn’t I be able to put money in and be able to take it out a year later and get that (tax savings)?’” Fitzgerald said. With the removal of that restriction by the Legislature earlier this year, any adult can now open an account for a beneficiary of any age, or for themselves to pay for more schooling.
Additionally, Principal Financial Group Inc. plans to launch a complementary college savings plan that will allow employees to fund their plan through payroll deductions, which Fitzgerald said should broaden the plan’s appeal to a wider range of investors.
A Principal spokeswoman declined to comment on the program, instead deferring to Fitzgerald.
“There are just a lot of people out there who won’t start a college savings program until someone sits down to explain it to them and say, ‘Here’s where you need to invest money and here’s a good program to invest in’” Fitzgerald said. That plan will probably be tested this fall with a probable rollout by the beginning of 2005, he said.
Fees will probably be higher for that program to compensate for the additional service offered, as will a broker-sold plan that the state is now investigating “and that Principal may be a part of,” Fitzgerald said.
Independent 529 Plan takes different route
The first national prepaid college plan geared to private schools has attracted 10 of Iowa’s private institutions to sign on since its launch a year ago.
The Independent 529 Plan allows parents to buy discounted certificates to pay a fixed percentage of tuition at participating institutions. Currently, 230 schools across the country have agreed to guarantee they’ll accept the certificates.
The biggest advantage of the plan is that “you’re buying tomorrow’s tuition at today’s prices,” said Pat Connor, a senior media relations officer for TIAA-CREF, the not-for-profit financial services company that manages the plan for the consortium of colleges. In addition to honoring a locked-in tuition rate, each participating school must also agree to provide a discount on the tuition of at least one-half percent.
Other advantages of the plan are that it eliminates the market risk of relying on investment performance, and like other 529 plans, it’s transferable to another family member if the beneficiary doesn’t attend one of the participating schools, Connor said.
A possible disadvantage is that assets in prepaid plans are
counted as the beneficiary’s own assets, rather than the parents’ assets, and this can reduce eligibility for federal aid on a dollar-for-dollar basis, he said.
About 1,800 people have invested approximately $27.4 million in the national plan. In Iowa, nine families are currently enrolled in the fledgling program, which in some states has not yet attracted any investors, Connor said.
Leanne Valentine, financial aid director at Buena Vista University in Storm Lake, said she has not yet heard of any families that have invested in the Independent 529 Plan.
“The advantage that we saw from an institutional standpoint was to try to find more families with an ability to pay,” she said. “We thought if we offered something like this, we might interest more families that are able to pay for their own education.”
Valentine estimated that 99 percent of families of Buena Vista students use some type of financial aid. If the school was able to supplement fewer needy students, it would mean more money available for facilities and programs, she said.
State Treasurer Michael Fitzgerald said the state considered its own prepaid tuition plan before adopting its investment-based College Savings Iowa program six years ago.
Most people surveyed by the state indicated they wouldn’t be interested in a state prepaid tuition plan, Fitzgerald said.
“And I was apprehensive about the state taking on a lot of risk, given how much tuition rates have been going up,” he said.
Fitzgerald, who personally invested in College Savings Iowa for the past four years while his daughter attended Simpson College, said he believes the Independent 529 Plan will run into the same type of problems other prepaid tuition plans have had — misperceptions that the plan can be used for any college.
“That’s why we kept coming back to the idea that Iowans want a simple program,” he said. “One that gives them tax advantages that they can use to pay for college, and at any moment they can call it up and say, ‘This is what I have.’”