Betting on your kid's college education

Source: Chronicle of Higher Education Shaded states indicate that a pre-pay tuition program is in place or is in the works

But while 33 other states have plans that allow parents to invest money for their child's education free from state income tax, Arizona's proposal is the only one that would not insure the investment with taxpayer money.

Arizona's plan involves more risk than some others, but it also allows greater flexibility.

The state Legislature passed the Arizona Family College Saving Program in April 1997, and the Internal Revenue Service is expected to approve the plan soon.

Verna Allen, executive director of the Arizona Commission of Post-secondary Education, said under the new plan, parents would pick one of three state-approved financial institutions and choose an investment plan.

They would have to agree that the capital and interest would only be used toward their child's college education. Those who withdraw the money early or for some other purpose would pay a 15 percent penalty.

Depending on the chosen bank or brokerage firm, parents could select financial plans with varying degrees of potential risk and return for their investment, Allen said.

Two private brokerage firms, Equitable Financial Group and Securities Management and Research, would offer an assortment of mutual funds and market-based investment choices.

College Savings Bank would offer the most secure option - the unique "Collegesure" Certificate of Deposit plan.

Investors would then designate a beneficiary, such as a child or grandchild, and start socking away money.

Currently, all states with prepaid tuition programs have a provision that guarantees a minimum return, using tax money as insurance.

Arizona's plan would not, so parents who choose a market-based plan - although the potential returns are greater - run the risk of losing money.

Allen said with other state prepaid tuition plans, so long as parents deposit money at a certain rate for a specified number of years, the states' treasury departments guarantee the earnings would be enough to send their child to any public university in their home state.

If tuition increases are greater than estimated or the money does not accrue interest as quickly as planned, the state would make up the difference with tax money, she said.

In Arizona, if the interest accrued is not enough to pay the whole tuition, investors would pay the balance.

"We did not think it (having future tax dollars back up the plan) was fair to Arizona citizens," Allen said.

Although the risk for Arizonans may be greater, Allen said the proposed program also has the most flexibility.

The Arizona college savings plan differs greatly from other prepaid tuition plans in that the money can be applied to any college in any state, she said.

Also, for those interested in exploring various capital returns, a risk profile can be done at the time the account is opened, Allen said.

Arizona Rep. Andy Nichols, who co-sponsored the bill along with state Sen. John Wettaw, said that when IRS approval has been confirmed the program will be launched.

Allen said the start date was rescheduled to make sure the Internal Revenue Service would approve certain aspects of the plan.

"The IRS has just come out with the proposed guidelines on college savings plans - so you can see why I'm pulling my hair out," Allen said. "They (the IRS) got behind the curve but now they are catching up."

The Commission of Post-secondary Education expects the IRS to allow federal income tax to be deferred until the beneficiary withdraws the money to pay for college. According to the plan, the money will then be taxed as student income.

UA students seemed to support the plan.

"Well, I think that's a good idea - if parents are willing to start saving," said Zack Maita, a media arts freshman. "I was fortunate enough to have my grandfather do something like that for me and my brother."

"It never hurts to try something new, especially if it's involving a child's education," said Arun Kumar an undeclared freshman. "The plan seems legitimate."

At its September meeting, the Arizona Board of Regents plans to discuss promoting the tuition plan as one of several ways to defray tuition costs, expected to increase in fall 1999, said President Judy Gignac.

"We feel that tuition costs should be raised, but there are a number of different tools to help," she said. "The Arizona Family College Savings Program is a wonderful addition to the tools out there at the federal level to defray college costs."

Nichols, a Tucson Democrat who is also a UA family and community medicine professor, said he and Wettaw, a Flagstaff Republican who teaches chemistry at Northern Arizona University, conceived the plan out of concern for general U.S. savings policies.

"We make ourselves vulnerable to certain milestones of life such as education," Nichols said.

He said that U.S. tuition rates have increased more rapidly than inflation in recent years.

"I felt it was important to have something that the state would sponsor," he said. "We may have the model program of this type in the country."

Allen said the Arizona plan will be observed closely to see how successful it is.

"Other states are using us as a guinea pig," she said.