A gift for grads: Saving for college made easier

Gayle B. Ronan • E-mail

As students across the country prepare for their graduation day, no doubt gifts will accompany the congratulations of friends and family members marking these scholarly rites of passage.

Those well-wishers may be interested in knowing the preferred gift among the young achievers’ parents is money for college — by a factor of five-to-one, reports a 2006 survey by Little Grad, a service that collects cash-back rebates for deposit to member’s college savings accounts.

“Because saving for college competes with all the other expenses a family has, it can easily end up on the backburner,” says Joseph Casey, a certified college planning specialist with College Planner LLC in Walnut Creek, Calif. 

In fact the overwhelming majority of parents believe “helping with college expenses is the best investment they can make in their children’s future,” according to survey sponsored by investment firm AllianceBernstein. Yet one-third have yet to make that investment, the study found. Among those who have, roughly two-thirds have saved less than  $10,000, or less than a year’s worth of tuition, room and board at the average four-year public institution in 2006. 

This widely shared deficit creates an opportunity for gift-giving occasions to take on added significance.

While U.S. Savings Bonds are the traditional gift for the potential college-bound student, they also represent an imperfect gesture, financial planners say.

“A key problem with savings bonds is they are often purchased in a child’s name, not the parent’s,” says Casey. While redeemed bonds are always free of state taxes, they are only federally exempt if used to pay for college by a bond owner who was at least 24-years-old when the bond was purchased, and whose modified adjusted gross income qualifies (less than $78,000 if filing single or $124,700 if filing jointly in 2006).  When purchased in a child’s name this option is negated.

New life for 529 plans
“We actually cash in the savings bonds we receive and put the proceeds into our 529 plan,” says Elaine Sullivan, a Boston-area mom, who is also the director of educational savings at Putnam Investments and responsible for the firm’s CollegeAdvantage 529 Plan, an investment product for college savings. 

Section 529 plans, named for the portion of the U.S. Tax Code that created them, are not new. But it wasn't until last year when Congress made their tax-advantaged benefits permanent. Before the lawmakers had acted, 529 plans were not heavily marketed and, consequently, were not widely owned. 

But now these plans are rarely inappropriate.  "They work for the wealthy as well as the middle class," says Casey.  "Congress made them an easy gifting strategy." 

They became even more attractive in late May when Congress passed new legislation closing the "kiddie tax" loophole.  The new legislation will subject investment income earned by students up to the age of 24 to their parent’s tax rate beginning in 2008.

Unlike their taxable, low-return alternatives — savings bonds, certificates of deposit and bank savings accounts — accrued earnings and withdrawals for qualified education expenses are free from federal taxes regardless of the account holder’s or the parent’s income bracket. With some programs, state taxes are also waived.

Also, unlike assets bought directly in a child’s name or with a named custodian under either UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act), the assets do not fall under the child’s control upon their turning 18 or 21 years old, depending on the state. 

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