When Jamie Duboise was in third grade, her parents put money in the Alabama 529 Prepaid Affordable College Tuition plan. She received a scholarship so her parents transferred the PACT account to her brother, who attended college in 2007. His tuition and fees were paid by PACT funds.
The 33-year-old, stay-at-home mom, who lives in Franklin County with her husband and three sons ages 5, 7 and 8, says they “wanted to do something like that” and so they were planning to have all three boys enrolled in the Alabama 529 CollegeCounts plan by the end of the year.
Their fund got a jump-start when they won $529 in a drawing that was part of the state’s promotional campaign, kicking off the new 529 program. Now they’re building the fund, with plans to contribute $100 a month to each boy’s account and add $50 birthday and $50 Christmas checks from her mother. By dedicating savings from their family budget — Duboise expects to return to fulltime work as a math teacher and her husband is a pharmacist — their goal is to “lessen the burden of college fees as much as possible. I don’t want them to graduate with so much debt.”
A promotional campaign was necessary for the same reason a new state 529 plan was necessary. The trust fund of the old plan, PACT, went bust against the 2008 recession, and participants sued the state for failing to deliver fully on expected benefits.
The PACT fund — which has been closed to new enrollment since 2008 and to new contributions from existing participants — has been slowly recovering after a class-action lawsuit was settled, which gave participants a payout equal to fall 2010 in-state tuition at the state’s public universities. Recently the board overseeing the PACT 529 program approved a 3 percent increase over the 2010 cap.
No mistake about it, CollegeCounts “is totally different” than the PACT plan, says Alabama Treasurer Young Boozer. The only thing the two plans share in common is that they “are vehicles for saving for college expenses, ” Boozer says, but there is even a difference there. PACT covered college tuition and fees only. Funds from CollegeCounts accounts can be used for qualified college education expenses, including room and board and books.
The PACT was a pre-paid program, while Boozer describes CollegeCounts as “a tax-deferred investment savings plan designed for people to save for college education, ” and because of that the individuals face the financial risk rather than the program itself.
Another important distinction is that funds in the CollegeCounts program can be used for both undergraduate and graduate qualified expenses. The PACT program was only for undergraduates.
What really changes the equation are an attractive state income tax deduction and the myriad of investment options in CollegeCounts. An Alabama resident receives a state income tax deduction of up to $5, 000 for an individual and $10, 000 for a married couple filing a joint return.
“When you combine the generous and attractive Alabama state income tax deductions of $5, 000 for individuals and $10, 000 married filing jointly and couple that with tax-deferred growth – so it grows tax free while it’s in the plan, ” says Jay Steinacher, 529 college savings group manager for Nebraska-based Union Bank & Trust, which manages the CollegeCounts program for the State of Alabama.
“It (the money) comes out tax free for qualified college expenses down the road and that’s one-year, two-year, four-year schools public/private in the State of Alabama and across the nation. It really is a great combination of federal and state income tax benefits that really makes it the premiere way to save for a loved one’s college (education).”
Alabama residents who have 529 plans with other states may roll over funds into CollegeCounts and receive the state income tax deduction, which was added to the program in 2006.
Participants cannot transfer a PACT account to CollegeCounts, but PACT participants can open a CollegeCounts account. CollegeCounts participants can continue adding to their account while their sons or daughters or grandchildren are in college, and sometimes that means five years or even six years.
It’s a daunting challenge for the Duboise family, considering that when their youngest goes to college it would cost $200, 000-plus for four years at The University of Alabama, according to a cost calculator on the Alabama Treasury Department website.
Boozer cites a study that concludes: “If a child has a college savings account in his or her name no matter where it is — no matter how big it is — they are six times more likely to go to college. It’s a huge motivator. It’s also a symbol. It’s a message to the child that these are expectations — these are aspirations and you are getting some assistance in your journey to get there.”
The CollegeCounts program is designed both for the novice and the experienced investor, and options range from professionally managed portfolios to ones that an individual can design.
The age-based and target portfolios are professionally designed and managed to eliminate day-to-day worries and reduce risk. Both offer conservative, moderate and aggressive options.
“If you do want the choice and the diversity and the flexibility to do your own thing, you have that option with all the individual fund portfolios as well, ” says Steinacher, whose firm took over management of the CollegeCounts program in 2010 when there was one mutual family. Now the program offers what Steinacher calls “best-in-class fund families, ” referring to such stalwarts as Vanguard, Fidelity Investments, PIMCO, Dodge & Cox Funds and T. Rowe Price. Participants can choose among many asset classes, including money market, fixed income, balanced, domestic large cap, domestic mid cap, domestic small cap, real estate and international. Participants allocate their assets among the various investment classes.
The CollegeCounts program makes college more accessible for Alabamians “only if they take advantage of the plan, ” University of Alabama professor Robert W. McLeod wrote in an email. “Other state plans are open to any resident so you could, for example, invest in the Utah plan, but you would not get the tax deduction on your Alabama income taxes if you use an out-of-state plan.”
The average balance in the 529 program is $15, 000 with a median of $7, 800, according to Boozer, and the average age of the student covered in the plan is a little more than 12 years. “The profile of the average and median would indicate that they will not be able to save everything they need to save for a four-year college education, but those savings will make a big difference in the expenses that are required and the money that’s required and the cash that’s required when those students get to school, ” Boozer says.
The Duboises hope their three boys will receive scholarships. “We already talk about it now, ” she says.
College does come quickly and Boozer recommends saving as soon as possible and as much as possible on a regular basis and “you let compound interest do its thing.”
Information about CollegeCounts can be accessed online, by phone and through program brochures.
The program’s growth has been “phenomenal, ” says Boozer — from $133 million in assets under management through December 2010 to $560 million through June 30. The number of accounts jumped from 14, 000 Alabama households to 37, 000. The program nationwide has 74, 000 accounts and $1.3 billion in assets under management.
David Zaslawsky is a freelance contributor to Business Alabama. He is based in Prattville.
Text by DAVID ZASLAWSKY