NEW YORK — A short but significant provision in President Bush’s proposed fiscal 2008 federal budget has cemented his status as the college savings plan industry’s new best friend.
Following last year’s milestone Pension Protection Act, which made federal tax breaks for the programs permanent, President Bush has proposed another boon for states and financial services companies that run and manage Section 529 plans: eliminating all assets in such plans from consideration in determining federal student financial aid. Observers caution, however, that getting the legislation passed is hardly a slam-dunk.
Currently, the federal government counts only a relatively small percentage of assets — up to approximately 6% — in 529 plans controlled by parents against a student’s aid eligibility. And since last year, assets in 529 accounts controlled by dependent students are not counted at all against their aid eligibility, though such accounts make up only 1% of all 529 plan accounts, according to estimates by the College Savings Foundation, a Washington-based industry association.
Common misperception
What makes President Bush’s budget proposal significant, say 529 officials, is a common misperception: that college savings plans play a far greater role in determining financial aid eligibility than they actually do.
“Parents always ask that question,” said Bruce Harrington, vice president and director of product management of 529 plans at Boston-based MFS Investment Management, “They want to know how 529 plans affect their financial aid, and to say it doesn’t at all is a pretty big win for the industry.”
Financial planners and advisers also have been unclear about the effect of 529 plans on financial aid, said 529 officials in Miami Beach, Fla., for the CSF’s recent annual conference.
“Financial advisers are raising the issue with us all the time,” said Jennifer DeLong, director of college savings plans for New York-based
AllianceBernstein Investments Inc. One of the industry’s largest players, it manages more than $7 billion for Rhode Island’s CollegeBoundfund program in Providence. “This gives us a terrific opportunity to educate advisers on the realities of financial aid,” Ms. DeLong said.
Financial advisers who view 529 plans as an unprofitable, time-consuming, “small ticket” item deliberately take advantage of the misperception among parents about the financial-aid consequences of the college savings programs, industry officials asserted privately at the CSF conference.
“Financial aid is one of the most significant issues facing families who want to send their children to college,” said Peter Mazareas, CSF treasurer and chief executive of Strategic Advancement Group Inc., a Nahant, Mass.-based consulting firm. “The misperception that 529 plans negatively impact financial aid is a major obstacle to sales. It’s raised at every conference I attend. Removing that issue will definitely encourage more participation [in the plans].”
“By taking 529 plans out of the financial-aid equation altogether, a major source of confusion would be eliminated,” said CSF chairman David Pearlman, who is senior vice president and deputy general counsel of Boston-based
Fidelity Investments.
Washington insiders say it’s too early, however, to gauge the proposal’s chances of becoming law.
“It’s extremely early to handicap,” James “Jamey” Delaplane Jr., a partner at the Washington law firm Davis & Harman LLP, said at a panel session, “529 Policy in the New Democratic Congress,” at the CSF conference. He added that key committee chairmen in Congress have not yet been fully briefed on the proposal by the White House.
“It would take a fairly significant push to make it happen,” Mr. Delaplane continued. “There are always relative priorities on the Hill, and I think there’s a little hesitancy by Democrats to make it a priority.”
Randolf “Randy” Hardock, also a partner at Davis & Harman and a Capitol Hill veteran, agrees with his colleague’s assessment. Mr. Hardock said he thinks the provision’s fate rests on how Congress views its potential to increase costs in the budget.
Financial planners at the conference said they hope that the provision does become law.
‘Few excuses left’
“It would clear up any confusion about the right path to take for students’ college savings,” said Joseph Casey, certified college-planning specialist and owner of College Planner LLC in Walnut Creek, Calif. “There would be very few excuses left to not make 529 plans part of a strategic plan to save for college.”
“I think most clients are unaware of how money held in 529 plans will affect any future financial-aid packages,” said Kevin McKinley, a certified financial planner and vice president of private wealth management in Eau Claire, Wis., with Robert W.
Baird & Co. Inc. of Milwaukee. “They will certainly appreciate any legislation that favors 529 plans in the financial-aid model, but I think the primary features motivating families to use 529 plans will continue to be control and tax-free withdrawals for qualified expenses.”
