New state plan allows families to save for college tax-free

Amy Hackbarth

Minnesotans soon can establish college savings accounts for their family members without paying taxes on them.

The new state plan will allow these accounts to build tax-free, starting January 2002.

“The main motivation behind this program is to give people an incentive to save for their children’s higher education,” said Phil Lewenstein, communications director for the Minnesota Higher Education Services Office, which will oversee the program.

In the Minnesota College Savings Plan, students and their families can save up to $100,000. If the money is used for higher education expenses like tuition, book fees, and room and board, no tax will be enforced on the saved amount.

Accounts are available for Minnesota residents but can be used at any college or university in the country. Parents, relatives or friends can create an account for any future college student.

Minnesota joins 36 other states in creating the accounts.

The program also offers matching grants as an added bonus for families that earn less than $80,000 annually. Families can receive up to $300 in matching grant monies.

For instance, Lewenstein said, if a grandmother donates $2,000 to her grandson’s account, she can apply for a $300 matching grant to also be added to his account.

Deb Pusari, associate director of undergraduate services for the Office of Student Financial Aid, said she knew few details about the program, but overall it would be beneficial to University students.

“Anything that encourages families to save for their children’s education is good both for the family and for the University,” Pusari said.

Most University students are unable to pay out of pocket for their education while they attend the University, she said. About half the approximately 44,000 University students on the Twin Cities campus applied for financial aid this year to help cover college expenses.

“If it spreads out the time people save money for college, it will give students a better chance of leaving their loans at school when they graduate,” Pusari said.

Jill Bissing, an elementary education junior receiving financial aid, said the plan could have helped her. Although she saved for school, Bissing’s financial aid package prevented her from paying her loans off at one time.

“I have a huge loan I’m going to have to pay off, and being a teacher, I won’t be able to,” Bissing said. “I wish this would have been around earlier, because I would have tried to save more.”

The Minnesota College Savings Plan was a long time in the making. Lewenstein said the Minnesota Legislature has been considering ways to motivate families to save for their children’s education for more than a decade.

The Legislature had to wait until 1996, when the federal tax bill freed the program college savings accounts from federal taxes. Minnesota, in turn, passed laws exempting the accounts from state taxes.

It took the Legislature four years to work out the kinks in the program. Legislators wanted to confirm that account information would remain private. They also made sure account contributors would pay no interest on matching grants.

House Taxes Chairman Ron Abrams said the House was in favor of the plan.

“It’s been successful in a number of other states, so we hope people will avail themselves of this opportunity here,” said Abrams, R-Minnetonka.

“I have a 13-year-old and a 15-year-old, and we’re going to have plans for both of them,” he said.

 

Amy Hackbarth welcomes comments at [email protected]