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With College Costs Sky-High, It's Time for a Savings Plan

Assembly tuition layaway plan could be a boon to parents

May 11, 1997

Financing a college education requires a long-term investment plan in these days of astronomically rising costs for a sheepskin. The alternative is debt, which today's students are being forced into at unprecedented levels: This year, California students will borrow $2.7 billion, more than double the 1990 total.

To encourage parents to start saving early for college, a number of states have established layaway tuition plans that offer tax breaks. California has been slow to take up the idea. Twice the Legislature passed a tuition savings plan, only to get a thumbs-down from the governor. This year there is new momentum, and competing proposals with very different views of the state's role.

The bills--one sponsored by Sen. Tom Hayden (D-Los Angeles), the other by Assemblyman Brooks Firestone (R-Los Olivos)--are similar in their aims but diverge on the issue of guarantees. The simpler, more flexible Firestone proposal is preferable to Hayden's.

Both proposals would allow parents to make contributions to a state fund. Professional money managers would invest the pooled funds, in a form similar to pension funds. The contributions would be exempt from state taxes and, thanks to a recent change in federal law, wouldn't be subject to federal taxes until the money was applied to tuition at an accredited college within or outside California. A participant could withdraw from either plan.

The Firestone bill, which has bipartisan backing and the support of the University of California, is similar to a regular savings account but would be expected to provide better returns because of the size of the aggregated fund. An additional advantage over personal investing would come in the form of tax savings.

Hayden's proposal, in contrast, is a tuition prepayment plan that would allow parents to lock in a state college or university education at today's rates. Hayden's program would guarantee all tuition costs no matter how high fees rose.

This might offer a stronger incentive to save, but it would be fiscally reckless for the state. It's difficult to project college costs or the condition of the economy over a prolonged period.

The cost of college tuition in California increased 113% between 1985 and 1995, while the median income for families with college-age children went up 39% and the cost of living rose 38%.

To fulfill the Hayden guarantee, if the college fund ran short of money "funds may be loaned from the general fund" of the state. Bad idea. On the other side of the coin, excess earnings could, under certain circumstances, be transferred by Sacramento to other state financial assistance programs for college students. Another bad idea. Might the Legislature tap the fund for other reasons in tight times, as it has in the past with some dedicated funds? The Firestone bill specifically forbids transferring or otherwise using money in the college fund for any other purpose.

Parents want and need a prudent college savings mechanism that delivers reasonable returns and is protected from legislative politics. Firestone's bill provides that.

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