January 04, 2002
Attractive College Savings Programs Yet to Embrace Socially Responsible Options
by William Baue
New regulations shelter certain college savings funds from taxation, but socially responsible
investors must petition their states to implement socially responsible options
The New Year brings good news for investors saving for college tuition, but not for the socially
responsible investors amongst them. As of January 1, 2002, college savings invested in
state-administered 529 funds, so-named after the section number in the Internal Revenue Code that
regulates them, will be exempt from federal income tax. Yet only one state, California, offers a
socially responsible 529 fund.
The history of 529 funds dates back to the late
1980s, when individual states created prepayment plans that locked in the current tuition rates at
public colleges and universities. These plans generated immediate income for the schools while
allowing residents to avert tuition inflation, which now runs at about four percent per year at
state schools and five percent at private schools, according to the College Board.
becomes of the money when students chose not to attend the prepaid state university? Faced with
this and other such dilemmas, states developed a second option: college savings plans. These plans
do not tie the investment to any particular educational institution, leaving that decision to
investors. More than the prepayment option, this college savings option sparked the popularity of
these types of funds, prompting the IRS to add section 529 to its Internal Revenue Code in 1996
(hence the name these funds have been known by ever since.)
529 plans also allow the
parent contributing money to the account to retain control over the account. Other college savings
plans, such as Uniform Transfers to Minors Act (UTMA) accounts, transfer control to the child named
as beneficiary when she reaches the age of majority-18 or 21, depending on the state. So if she
decides to attend raves instead of college, she cannot squander 529 funds without her parents'
Rules regulating 529 funds vary from state to state, and the above description
simplifies the workings of these funds. For example, many states offer tax deductions to their
residents, thus encouraging investment in-state and discouraging investment in other, competing
states' programs. Although some recent changes increase the complexity of 529 funds, these changes
tend to favor investors.
"There's a clear trend that the menu of investment options is
being expanded in a lot of states, as well as new providers coming along with new programs," said
Joe Hurley, CEO of SavingsForCollege.com, a comprehensive web-based
resource on 529 funds.
TIAA-CREF administers the only socially responsible 529 fund,
through California's Golden State ScholarShare College
Savings Trust. Of the 55,875 college savings accounts TIAA-CREF manages, about five percent,
or 2,900 accounts, chose the socially responsible 529 fund, according to TIAA-CREF Senior Media
Relations Officer Jim Tolve.
Socially responsible investors who do not reside in
California can invest in the Golden State ScholarShare program. However, those investors could
potentially get more tax benefits if they invested in a 529 fund in their home state.
According to Mr. Tolve, TIAA-CREF could offer socially responsible 529 funds in the other 11
states TIAA-CREF services. But those state governments would first have to approve socially
responsible options for 529 funds.
"Because you have the states involved, there is a
political element here," said Mr. Hurley. "If there's enough call for [a socially responsible
investment option] by residents of the state, the state agency, state treasurer or state
legislators will listen to that, and they can force an SRI option."