ScholarShare: How It Works

Golden State ScholarShare is a state-run college savings plan that allows parents and others to invest money tax-deferred for college education costs. Here are its key features:

*

Tax Advantages

Money contributed to a ScholarShare account is not tax-deductible, but all earnings will accumulate tax-deferred and withdrawals will be taxed at the student’s rate. (There is a movement in Congress to make college savings plan withdrawals tax-free, but its prospects are uncertain.)

*

College Choice

Students with ScholarShare accounts are not required to attend a California school; they can attend any accredited U.S. institution and use account money for tuition, room, board, books, fees and supplies. Contributors who open an account are not required to specify which college the student will attend, although the type of college (public or private) will be used to determine the maximum contribution allowed. When the student enrolls, money will be distributed directly from the account to the college.

*

Investment Manager

ScholarShare funds will be invested by Teachers Insurance & Annuity Assn. College Retirement Equities Fund, the world’s largest pension fund manager and a company that runs college savings programs for other states. The California Student Aid Commission will administer the program, and TIAA-CREF’s investment policies will be overseen by a three-member investment board that includes the commission’s executive director, the state treasurer and the state director of finance.

*

Investment Limits

ScholarShare will accept as little as $15 a month to start an account. The maximum you can contribute depends on the age of the prospective student and what kind of college you expect the student to attend. ScholarShare uses a formula to determine how much you can invest, given the time until enrollment, to meet your goal. The maximum allowable limit will be set according to the most expensive private institution in California, which is currently Stanford University, where tuition, fees, room and board are $33,567 this year.

*

Income and Residency Limits

There are no income limits restricting contributions. Any adult (or emancipated minor) can open an account either for him- or herself or another person. Accounts are not limited to Californians; residents of any state may open an account.

*

Substitute Beneficiaries

The contributor, not the student, controls the account. In other words, the person who contributes the money determines who gets it. Contributors can change beneficiaries or cancel the account at any time. If the account is canceled, the contributor must pay income taxes and a 10% penalty on the money. Beneficiaries can be changed to any family member of the beneficiary, so if the student who was originally named as the beneficiary decides not to go to college or does not use all the money, it could be used by a sibling, parent, child or other close family member, including in-laws, aunts, uncles, nieces and nephews.

*

Asset Allocation

People who contribute to ScholarShare accounts cannot choose the investments or how the money is distributed among stocks, bonds and cash. TIAA-CREF will choose the investments, and the mix of investments--the asset allocation--will depend on how long the student has before beginning college. The further away the goal, the more heavily weighted the investments will be in stocks. The investment mix gradually changes as college approaches, to become more weighted toward bonds and cash, which are considered less risky investments than stocks.

*

Estate Planning

Contributions to a college savings account can be prorated for five years, meaning that up to $50,000 can be contributed in one year without making the donor subject to gift tax requirements. (Any other gifts made during the next five years would potentially be taxable.)

Accounts Could Be a Good Idea for:

* People saving for college, particularly those in higher tax brackets.

* Parents or others who want to maintain control of college money.

* Grandparents or others who want to reduce the size of their estates to avoid estate taxes.

Accounts May Not Be a Good Idea for:

* People who want to choose their own investments.

* People who don’t want to take any risks with their college savings.

* People who have not saved enough for their own retirement.

*

Investment

*--*

horizon* Stocks Bonds Cash 17-18 years 75% 25% 0% 15-16 years 65 35 0 13-14 years 55 45 0 11-12 years 45 55 0 9-10 years 40 60 0 7-8 years 35 65 0 5-6 years 30 70 0 3-4 years 20 70 10 1-2 years 15 50 35

*--*

*Time until enrollment in college