Plans help parents save for child’s education

Chris Jones

Wednesday, Jan. 2, 2002 | 11:25 a.m.

Shortly after the birth of her first child in February 2000, Joyce Ballesteros closed her eyes and contemplated the past and future.

At home on maternity leave, the new mother thought back upon the financial struggles she encountered as a young student at an Arizona technical school.

It wasn't hard to recall the sacrifices she and Ruel, her future husband at the time, made to pay for the tuition, books, housing and food requisite with attending school away from home, she said.

Holding her infant, Ballesteros looked ahead and promised she'd do all she could to spare her daughter Joruelyn the same challenges should she later elect to pursue a higher education.

When Ballesteros finished her maternity leave and returned to work at the Clark County Aviation Department, she learned of Nevada's Prepaid Tuition program, which allows residents to lock in present tuition rates by contracting to pay for their child's education in advance. After a short discussion with her husband, the Henderson couple agreed to pay $50 per month into a state- sponsored fund that could ultimately secure the affordable financing of their daughter's college education.

"I'm still paying for college," Ballesteros said. "My parents couldn't afford to help me pay for school, but we want to do everything we can for our child, and college was one of our top priorities."

Soon others looking ahead to college will have new incentive to put money aside for higher education: tax savings.

Congress last year approved legislation that will make contributions to qualified state funds tax-exempt beginning Jan. 1 until at least 2010, provided the funds are used for educational purposes upon withdrawal. Previously such contributions were only tax-deferred until withdrawn, at which point specially reduced student tax rates would take effect.

Section 529 of the federal tax code has allowed investors across the United States to save for their educational needs with minimal tax impact since 1997. Nevada is one of 47 states to sponsor one or more so-called 529 plans, beginning with its now four-year-old Prepaid Tuition program, which has more than $30 million under management on behalf of more than 8,000 prospective students.

In the long term, however, state Treasurer Brian Krolicki said a newly approved avenue could offer more significant financial benefits.

Last fall Nevada launched a second 529 fund that allows for more flexibility than was available under the Prepaid Tuition program. Called the Savings Plan option, its participants can contribute up to $246,000 for education-related expenses such as books, lab fees, housing and meal programs in addition to tuition. Funds contributed to Nevada's Prepaid Tuition plan are limited to tuition fees, Krolicki said.

"This (Savings Plan) is by the far the best way to save for college," Krolicki said. "It goes along with Prepaid Tuition and even the Millennium Scholarship to cover the other expenses associated with getting a higher education."

Savings Plan accounts can be opened for as little as $250 and are open to contributions at any time of the year, Krolicki said. He said the Prepaid Tuition plan functions more like a contract, offering its investors limited periods to open new accounts while requiring contributions in a lump sum or fixed payment schedules.

Ballesteros said she enrolled Joruelyn in the Savings Option in September after she researched the plan and compared it to those offered by other states. While the additional $50 monthly outlay has put a crimp on her family's budget, she said the flexibility of Nevada's 529 programs have made the investment worthwhile.

Since its inception Oct. 1, Nevada residents have opened 144 new Savings Plan accounts. They've been joined by an undisclosed number of participants outside the state who could eventually make up the bulk of its participants.

By law investors are free to participate in most state's 529 plans, regardless of where they reside. Those close to Nevada's plan believe its flexibility could make it one of the more popular college savings options in the country.

"We've designed a program that is unique in this country," Krolicki said. "Our Savings Plan has multi-manager capability, so we have a whole brokerage network of partners and sub-advisers that are selling 529 products all over this country that accrue to the benefit of the state of Nevada."

Nevada has contracted with Wisconsin-based Strong Capital Management to offer a wide variety of college savings fund options to investors. In turn, Strong is able to farm the funds out to additional investment management companies through sub-agreements that contribute money from each sale back to Nevada.

Michael Murray, national markets director of mutual funds for Connecticut-based investment firm American Skandia, said his company encountered a record number of phone inquiries when it began accepting investments in Nevada's 529 Savings Plan option last month.

"The response has been remarkable," Murray said. "The flexibility (Nevada) has offered investors is what's driving interest.

"The reason anyone buys an investment product is for performance, and the more you can diversify that investment the better your chances are long term. With up to nine different mutual fund families involved in this product, Nevada has offered a unique opportunity to investors."

Murray said Strong would likely service investors who feel comfortable buying into the fund directly, while American Skandia's network of 55,000 financial service consultants would assist those in need of financial advice. He said Wells Fargo Bank has already signed on to sell its customers Nevada's 529 plans through American Skandia, with a number of Southern Nevada community banks in negotiation to do the same.

Nevada residents pay no load fees to establish 529 accounts through Strong and American Skandia, but that loophole does not apply to out-of-state investors. Krolicki hopes extra funds generated by out-of-state buyers will eventually enable him to remove the operating expenses associated with the Prepaid Tuition program from the state's budget.