 More than 250,000 people are enrolled in Illinois' college savings
plans -- an increase from 232,000 participants in 2009, according to
state audits."It's a longer term investment. The market has come
back -- almost all the way back. You just need to ride these things
out," said Susan Carr-Templeton, an Illinois resident and financial
adviser who invested in a savings plan for her two teenage children.
Roger Michaud, chair of the College Savings Foundation, said the
increased participation is to be expected, considering the rise in
college costs.
"Number one, investors and savers are probably a bit more
confident in the market over the long term," said Michaud. "But more
importantly, I think they are realizing that as their kid gets
older, (they're) running out of time, and they're putting money to
work."
Some investors, however, are less fearful of market volatility
than they are about the safety of their investments in a state that
is facing its largest budget deficit in history.
"I just don't know what could happen. Like if the rules get
changed by the state, if they are out of money, and then I put all
this money into the plan. Then all of a sudden it changes and it's
not the same plan I originally invested in -- that would bother me,"
said Matt Olech, an Illinois resident looking to invest in a savings
plan for his unborn daughter.
Joan Marshall, chair of the College Savings Plan Network, an
industry association of 529 plan advocates, said it is highly
unlikely that states would tap into savings funds, no matter how bad
budget problems get.
"I don't know of a single state where the state can take money
from that plan," said Marshall, who also heads the college savings
plan in Maryland. "Nor would it be in the state's interest to do
that, because the state is setting up a commitment to allow that
family to get tuition benefits in the future."
About 9.5 million people in the United States currently
contribute to some type of 529 plan, according to Financial Research
Corp., an investment research firm.
The 529 plans -- named after a section of the Internal Revenue
Code -- are savings plans run by a state or educational institution
as an investment vehicle to pay for future college costs.
Illinois offers three options:
Bright Start College
Savings Program,
Bright Directions College Savings Program and
529 Prepaid Tuition
Program.
Despite their names, Bright Start and Bright Directions work more
like a 401(k) or educational IRA. Investors place money in mutual
funds, which is then invested by program managers. Profits are tied
to the market value of the option the investor selects.
The 529 Prepaid plan allows investors to save in advance the
amount it costs to attend an in-state public college. Accounts are
guaranteed to increase in value at the same rate as college tuition,
effectively allowing parents to lock in current tuition rates.
Like many other states, some of Illinois' plans are overseen by
the state treasurer, who is tasked with ensuring the money is
properly invested.
"The assets within our Bright Start and Bright Directions are
held in a trust ... so the assets held in trusts cannot be diverted
to the state general revenue funds," said Melissa Hahn, a
spokeswoman for Treasurer Dan Rutherford.
Managed by the Illinois Student Assistance Commission, funds in
Illinois' prepaid plan also are placed in a trust. The state,
however, is not required to make payments if the program were to run
out of money.
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Andrew Davis, executive director of the Illinois Student
Assistance Commission, doesn't anticipate that to happen anytime
soon.
"The actual dollar side of our trust fund has never been bigger,"
said Davis, who cited $1.1 billion in assets in January 2011.
"(Payments) go out and they are timely. They are accurate and
they are fully every penny that the families have contracted for. I
have every reason to believe that this will continue for many years
to come," Davis said.
The organization pays out about $60 million to $65 million every
year in tuition benefits, Davis said.
Unlike college savings plans, however, contracts for prepaid
plans have seen a slight decrease in the past three years, leveling
off to about 3,000 per year.
Alan Wolan, a financial consultant for Coe Financial Group,
doesn't consider 529 plans as his "first choice." Some of his
clients have never made a profit or broken even on their
investments.
"It's a very tough situation. For most of my clients who went
through (market losses) and were close to college, I tried to
allocate their funds much more conservatively with a lot more bonds,
but it's pretty hard to recover," Wolan said.
Offered by every state, 529 plans are primarily marketed for
their federal and state tax savings benefits.
Participants in both savings and prepaid programs receive a state
tax deduction for contributions up to $10,000 per year for an
individual and up to $20,000 per year for a married couple filing
jointly.
After a nearly 67 percent personal income tax increase was signed
into law last month, Illinois families can expect to see a little
more tax savings. The measure raised the state's flat personal
income tax rate from 3 percent to 5 percent.
"Right off the bat, your money has gained notionally 5 percent
this year. That's a really good savings plan, if instead of $95
invested, you have $100," said Craig Chapman, a finance professor at
Northwestern University.
On the federal level, qualified withdrawals can be made without
having to pay taxes on the earnings.
Morningstar, an investment research firm, rated Bright Directions
and the Bright Start plans above average.
"The ones that we rated above average and top, I'd say we have
the most confidence in," said Laura Lutton, editorial director of
mutual fund research at Morningstar.
But Lutton also issued a word of warning for potential investors,
saying the market crash of 2008 was a "worst-case scenario for a lot
of parents."
"Everybody is different, and everybody's tolerance for risk is
different," Lutton said. "It's important for parents to honestly
view their financial situation and decide how much risk they want to
take with the 529 plan and choose accordingly."
[Illinois
Statehouse News; By MELISSA LEU]
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