Free money: California offers up to $225 to open a college savings fund for a child

Graduates seen in silhouette line up at a college commencement ceremony
To help California families save for college, the state’s ScholarShare 529 plan offers to match the first $200 contributed in the first year of an account.
(Seth Wenig / Associated Press)

California’s official college savings plan is again offering low- and moderate-income households an incentive to start socking money away for their kids’ higher education. This week the plan, dubbed ScholarShare 529, announced a new round of grants that will provide up to $200 in matching contributions, plus $25 for new sign-ups.

ScholarShare is what the IRS calls a 529 plan, meaning it’s a state-sponsored savings plan that offers tax breaks under Section 529 of the Internal Revenue Code. Although those breaks are more meaningful for people in higher tax brackets, the simple act of saving for college pays dividends for any family with kids who want to earn a degree.

That’s because even a small amount invested early on can grow significantly over the years, helping you to reduce the amount you or your children will have to borrow. Likewise, every dollar you don’t borrow will translate into less interest you or your future graduate will have to pay on college loan debt.


And borrowing is an issue even for families who qualify for financial aid, said Julio Martinez, executive director of the ScholarShare Investment Board. According to the National Center for Education Statistics, students who received federal tuition grants still faced at least $9,000 in college or community college costs in 2018-19, the most recent year reported.

State Treasurer Fiona Ma, who chairs the ScholarShare Investment Board, said in a news release that the mere act of saving for college is strongly correlated with students continuing their education after high school. According to Ma, studies show that children with even a small amount of college savings are “three times more likely to enroll in higher education, and four times more likely to graduate, than those without a college savings account.”

Here are the details on how the state’s plan works and how to apply for a matching grant.

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What is ScholarShare 529?

A program exclusively for California residents, ScholarShare helps you set aside money for most types of education beyond high school, including college, graduate school, community college, trade school and apprenticeship programs. A good rule of thumb, Martinez said, is that if an institution accepts federal student loans, you can use ScholarShare dollars to cover costs there.

You’ll need to be at least 18 years old and have a Social Security or taxpayer identification number to set up an account. Your beneficiary will also need an SSN or TIN. You may set up an account for yourself or anyone else, even someone not related to you, but each account can benefit only one person at a time.

Once you set up an account, you can choose from among four types of mutual fund investments: funds with low risk and low growth, funds that spread money across a diverse range of holdings, funds that focus on one type of holding, and funds that gradually reduce risk as a child ages.

You can get started at the ScholarShare website or by calling (800) 544-5248. There’s also a version of the site in Spanish.


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What are the tax benefits?

The contributions to ScholarShare aren’t deductible from your federal or California income taxes (unlike more than 30 other states, which allow at least a partial deduction or credit). The interest, dividends and capital gains your savings earn, however, are not taxed. That’s a significant benefit, sparing these accounts from taxes that would drag down their growth, although the value of the benefit increases as you climb into higher tax brackets.

You’ll also be able to withdraw money from the account without taxes or penalty, provided you spend it on a qualified educational expense, such as tuition, room and board, computers or books. If you use any of your plan’s earnings on a nonqualified expense, you’ll pay taxes on those earnings plus a 10% penalty to the feds and a 2.5% penalty to California.

Federal law also allows up to $10,000 annually in tax- and penalty-free withdrawals for elementary, middle and high school tuition, but California does not. In fact, if you use ScholarShare earnings for those purposes, you’ll be hit with a 2.5% penalty on top of the taxes.

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What is the matching grant program?

Martinez said ScholarShare’s leaders wanted to respond to criticism that 529 plans were designed to help the well-off, so in 2018 they started offering households that earned no more than $75,000 a year up to $225 in matching dollars and grants for new accounts for children under age 15. The effort is now in its fifth year.

Here’s how to qualify for the aid. If you set up a new account with automatic, recurring contributions of any amount, ScholarShare will kick in $25. Regardless of whether you qualify for the $25, the plan will match the first $200 in contributions you make by the end of 2022. Children are eligible as long as they will be 14 or younger on Dec. 31 of this year.

Martinez said the grants, which come out of the plan’s marketing funds, are flowing to a rapidly growing number of Californians. Still, of the roughly 375,000 ScholarShare account holders, only about 1,100 signed up last year and received matching grants, he said.


According to estimates made last year, Martinez said, a little more than 8% of ScholarShare account holders in mid-2020 were from households earning less than $50,000. An additional 22% earned $50,000 to $100,000.

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