California is among about a dozen states in the process of launching a college savings plan in the wake of new federal tax laws that give these plans special tax treatment.
Thanks to tax laws passed in 1996 and 1997, parents can save through qualified state college savings plans on behalf of their children, and the money is allowed to grow on a tax-deferred basis. In other words, no one pays tax on the buildup until the money is withdrawn to pay college expenses. And then, it is taxed at the child's income tax rate.
The Golden State Scholarshare Trust, which received approval last year and formally took effect in January, is a savings plan in which parents can save anything from a small amount to the full cost of college tuition, fees, transportation and lodging.
The money will go into a state pool that will be managed by an outside firm, said Bob La Liberte, Scholarshare implementation consultant with the California Student Aid Commission in Sacramento. The money is expected to be invested in a diversified mix of assets, including cash, stocks and bonds. However, it is unclear what rate of return parents might expect to earn on the money.
When the child reaches college age, the money can be used at any accredited college or university. The trust will simply send the tuition check to the college that the child picks. However, while savings plans like the one that California adopted are highly flexible, they do not guarantee to pay the full cost of college. They simply give parents a tax-favored option that can be used like any other dedicated savings account. The one catch: If the child decides not to go to college--or the parents decide they need the money for some other purpose--the state will impose a penalty. The amount of the penalty has not yet been determined.
The state expects to have more details in late summer after it completes the bidding process with investment vendors, La Liberte said. Until then, parents who want more information about Scholarshare can visit the organization's Web site at http://www.csac.ca.gov. Parents can also call (916) 526-7590 and leave a message to have plan materials forwarded once they become available.