College savings programs receive tax exemption

LEXINGTON, KY – In addition to watching their mailboxes for the tax rebates, millions of families will soon receive increased incentives to save for college through the new federal tax bill.

The Economic Growth and Tax Relief Reconciliation Act of 2001 signed into law Thursday by President Bush grants federal tax exemption on earnings from state plans, when used to pay for qualified higher education expenses.  Higher education expenses that can be paid with these accounts include, tuition, room and board, books and fees, and any other expenses that students are required to pay to attend any accredited college or university in the United States. 

“By making the earnings from these accounts tax free, the President and Congress have provided a powerful incentive for families to save for the future costs of sending their children to college,” said New Hampshire State Treasurer Georgie Thomas, the Chair of the College Savings Plans Network.

Several additional provisions in the tax law also favor state college savings plans, these include,

1. Increased limits on room and board expenses that may be paid from an account,

2.  The transfer of account benefits to first cousins, and 

3.  An annual “rollover” of an account from one qualified tuition program to another qualified tuition program for the same beneficiary.

 There was strong bi-partisan Congressional support for the tax exempt treatment of account distributions, including Senators Mitch McConnell, R-KY, and Bob Graham, D-FL, who sponsored the original provisions in the Senate.  “This legislation makes a college education more affordable and helps families prepare for the costs of sending a child to college,” said McConnell.  Both senators have been long-time supporters of state college savings plans and improving college savings opportunities for families.  This legislation is endorsed by the National Association of State Treasurers and the College Savings Plans Network.

 All 50 states and the District of Columbia have a qualified tuition program in operation or are in the process of developing a plan.  Over 1.5 million children from across the country have been enrolled, representing more than $9.5 billion dedicated for future college costs. The mission of these state plans is to increase access to higher education by offering families a simple, safe, affordable and dedicated way to save for college tuition.

 These state plans come in two forms, prepaid and savings plans.  The prepaid tuition plans offer families an option to prepay tuition based on today’s costs of college tuition and provide a guarantee to keep pace with tuition inflation. The savings plans offer dedicated qualified state college savings accounts which provide families a variable rate of return, but are not guaranteed to keep pace with tuition inflation.

 In addition to federal tax exemption, many states also offer significant state tax incentives which include state tax exemption on the earnings and deductions from income taxes based on annual contributions.

 In general, the provisions are effective for taxable years beginning after December 31, 2001.  For more information about state college savings plans, call 1-877-CSPN-4-YOU or go to www.collegesavings.org. Additional information on federal initiatives of the Network is available at http://www.collegesavings.org/federal_initiatives.htm.

 ###