Fees foster state spirit for saving

August 1, 1997

mounting tuition fees and a rising burden of debt on students in the United States has driven the families of more than 700,000 children to enrol in state savings plans where they pre-pay university and college costs years in advance.

The Clinton administration and congress are in talks on tax breaks that would offer parents a compelling financial incentive to join such schemes, already established in 16 states and likely to go on the books in the remaining 34.

The schemes typically promise a hedge against future hikes in fees. Diana Kantor, executive director of Virginia's Prepaid Education Program, said: "You are locking in tomorrow's tuition at today's prices."

Kathy Tyson, a spokeswoman for the National Association of State Treasurers, which operates an umbrella group for the individual states' saving schemes, said: "Parents in this nation have been keeping an eye on the rise in tuition and it's a concern."

Ms Tyson said that in the past 15 years, average university tuition costs have risen 234 per cent, more than double the 82 per cent rise in median household income and 74 per cent inflation.

In other words, the price of higher education eats up a much larger piece of the family pie, and it is reflected in the amount of student debt. In 1976 loans financed just 17 per cent of tuition; by 1987 they accounted for more than half.

A recent report from the College Savings Plan Network, a subsidiary of NAST, says more than 700,000 children are enrolled, in plans worth $3.2 billion. In 2006, it is projected, they will have drawn in 1.7 billion children and $6.5 billion in assets.

Critics allege that the pre-paid tuition programmes are operating as a tax shelter for those who can already afford to pay. But supporters say they promise peace of mind in middle-income homes.

Typically, families contract to make monthly payments or invest a lump sum when their children are only a few years old. Parents or grandparents can pay in. In return they get a guarantee that the money will cover fees at a public university in the state where they live, or they can use it against fees at another college.

Some colleges run their own private contribution systems, but most are non-profit state systems. The first began in Michigan in 1988; Florida and Ohio followed. But in the past four years, the number has soared.

Alfred Strickler, vice president of a medical equipment company, invested $14,000 in the Virginia programme for his one-year-old daughter Olivia, buying four years of university. He and his wife are considering doing the same for their baby son, Harrison.

"We don't know how much tuition is going to be in 16, 17 years," he said. "It is increasing year after year and we are worried about whether or not we will have the financial capability to pay."

Tax breaks have helped popularise the schemes. Earnings on investments in these schemes are taxed at minimal rates; the federal government is now considering legislation that would make them tax free, providing a huge incentive to sign up. They do not cover room, board and transport, which can equal tuition.

Mrs Kantor, the Virginia executive director, recently enrolled her own two-year-old son in a 16-year savings plan.

She jokes that she has already chosen colleges for her three children: the University of Virginia, where her six-year-old boy will play quarterback on the football team; William and Mary College for her daughter; and Virginia Commonwealth University for her youngest.

The average price for a four-year university in the Virginia state system is now $16,000. State college fees range from about $2,500 a year to $6,000 at the most expensive, Virginia Military Institute, a celebrated military academy.

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