TuitionEdge assets grow 29 percent

By Sean Hao
Advertiser Staff Writer

A state program designed to encourage parents to save for their children's education appears to be growing up fast.

The sooner money goes into a college savings plan, the more prepared parents will be to finance their children's college education, financial planners say. Advertiser library photo • April 19, 2001

Formed in late April last year, Hawai'i's so-called 529 college savings plan is relatively small, ranking 47th in assets among all states and the District of Columbia, according to the Financial Research Corp.

Still TuitionEdge officials said they're pleased with the plan's growth so far, considering the low level of public awareness about the plans and a multi-year bear market that's just now in retreat. Moreover, many parents have to worry about saving enough to cover their own retirement needs while providing for their children's education.

All of those challenges have had an impact on the plan's size, said Dan Carlson, a manager at Philadelphia-based Delaware Investments that administers Hawai'i's 529 plan. But he said: "It's going well. I think we're doing about what we expected to do."

Hawai'i was also among the last states to establish a 529 plan.

Named after the section of federal law that created the plans in 1996, the 529 plans were established as a means of ensuring access to higher education amid ever-rising college costs.

Adjusting for inflation, the average tuition at public research and doctoral institutions rose from about $4,000 between 1992 and 1993 to $4,800 between 1999 and 2000, according to the National Center for Education Statistics. At private not-for-profit baccalaureate institutions, the average tuition rose from about $19,600 to $22,200 between the two periods.

TuitionEdge, which is marketed locally by First Hawaiian Bank, attracted 1,483 accounts as of March 31. The plan allows a family to sock away up to $297,000 in after-tax contributions to pay the future higher education needs of a child.

When used for qualifying costs such as tuition, housing or books, the money can be withdrawn free from state and federal taxes. However, unlike some states, there is no Hawai'i tax deduction available for contributions, possibly another reason for the plan's smaller size.

While 529 plan money must be spent on higher education, a plan beneficiary can be redesignated to include a different child or even the plan's contributor.

That flexibility is one trait that attracted John Higham to TuitionEdge shortly after it was started. Higham, a vice president for Ka'anapali Development Corp., has children ages 10 and 12.

"There's so many unknowns because you don't know for sure whether your kids are going to grow up and go to college," he said. "There's a lot of flexibility for other family members. So that was compelling."

As is the case with saving for retirement, the sooner parents start a college savings fund, the less money they'll need to set aside later, said Judith Slawsky, a Honolulu financial planner.

When to start? The earlier the better, she said. Compounding means that less money will be needed later.

Just how 529 plans will affect a student's access to financial aid programs in the future is unclear. But in general, Slawsky said 529s are more suited to families in higher tax brackets whose children likely will not be eligible for needs-based financial aid.

"I think they're good for anybody, but if a child is eligible for financial aid, that would be a deterrent," she said.

But parents don't have to be loaded to start a 529 savings plan. The plans are open to anybody; at First Hawaiian, a TuitionEdge plan can be started with as little as $15.

That money can be put into a variety of investing options, which include age-based portfolios that weight stocks and bonds differently depending on the age of the beneficiary. Portfolios of younger beneficiaries that may not need the money for many years would likely include more stocks and risk than those designed for 18-year-olds.

Despite last year's continued meltdown on Wall Street, Delaware Investment's fund for children up to age 3 had fallen about 6 percent since inception, as of Thursday, but it was up nearly 13 percent on the year. The fund for those 18 and over was up about 6 percent since inception and 4 percent year-to-date.

The 4 percent compares with a 3 percent rise in the typical 529 college savings age-based stock and bond fund through April of this year, according to market analyst Morningstar Inc.

While relatively unknown, the 529 plans are quickly becoming the college savings vehicle of choice with Americans pumping $10 billion into them last year. That compares to about $2 billion placed into education Individual Retirement Accounts, or Coverdell IRAs, over the same period, according to the Financial Research Corp.

Though Coverdell IRAs allow withdrawals for elementary, high school as well as college costs, they only allow tax-free savings of up to $2,000 a year.

The contribution limit for the 529 plans is $11,000 a year, or a maximum of $55,000 provided there are no other contributions for the next five years.

The 529 plans have skyrocketed from about $2 billion in 2000 to $21.3 billion at the end of March, said Whitney Dow, director of Education Savings Research for Financial Research Corp.

"They have really been growing fast," he said.

Their popularity also stems from their use as a haven from taxes and as a vehicle for transferring wealth from one generation to another, said Casey Copus, manager for First Hawaiian's First Investment Center. Account holders, rather than beneficiaries, decide what to invest in and when to make withdrawals.

"For a grandparent, it is a way to move money from your estate while still having some control over it," Corpus said.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.

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