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College Savings Plan Gets Smarter

Law Change Allows NY 529 Plan to Welcome Contributions from Friends, Family

Friends and family members of New York college-bound students can now make contributions to a student's 529 college savings plan, thanks to a change in New York State law that mirrors similar programs in other states.

With $8.3 billion in assets, New York's 529 plan has bragging rights to having the largest direct-sold channel with $7.1 billion across 500,000 accounts as of May 2008. Its companion advisor-sold plan channel has additional assets of $1.2 billion and 100,000 accounts. With combined assets, New York is overall the fourth largest college savings plan in the nation.

Before it was amended on May 22, the law previously only allowed contributions to be made to a college savings account held for a beneficiary, college-bound child by the actual accountholder - usually a parent. The new rule relaxes that standard, opening up the plan to accepting contributions from others interested in helping "junior" sock away money for future college expenses.

That new audience can include aunts, uncles, grandparents and other relatives as well as friends and even benevolent employers who may wish to dangle that carrot as an employee perk or use it as retention tool. The plan can accept contributions as small as $15 within the direct plan.

Come One, Come All

"The vast majority of states do allow for third-party contributions," said Peter Angus, chief operating officer of Upromise of Newton, Mass., the administrator of the New York College Savings Program which has both Vanguard Group and Columbia Management as its direct-sold and advisor-sold managers, respectively.

The change to the law erased a previous deficiency that prohibited third-party contributions in New York's 529 plan. Such a change required state legislative approval, an initiative that was begun about three years ago, but fast tracked to fruition just a few months back, Angus said. That regulatory change was the collaborative effort of Upromise, the two investment firms and the New York State Comptroller's office, he added.

Broadening the contribution audience for the NY 529 plan may not seem like a big deal, but it can translate into big bucks.

Since Upromise first took over from TIAA-CREF as administrator of the plan in 2003, it has had to turn away an estimated 20,000 checks from non-accountholders totaling a whopping $57 million. On average, that comes to more than $11 million a year in donations from generous individuals that the plan was forced to let slip away.

Ugift, We Invest

Upromise, which is the largest single plan administrator to 18 college savings programs across 11 states, is planning a series of initiatives aimed at getting the word out for the New York plan, said George DuCasse, who manages Upromise's relationship with the State of New York. Accountholders will be notified of the new gifting option with the mailing of their second quarter 2008 account statement in early July.

In addition, Upromise field reps in New York City and other areas will be talking up the option as will the New York State Comptroller's office and the NYS Higher Education Services Corp. which guarantees Federal and parent loans and is the administrator of New York's Tuition Assistance Program grants, DuCasse said.

"It's not a must-have feature (for a college savings plan), but I don't know of any good reason why third parties shouldn't make contributions to the account," said Joe Hurley, vice president and founder of, now a Bankrate company.

This past November, Upromise included the two channels of the Nevada state 529 plan it manages in its online gifting program called "Ugift" which allows accountholders to go online and create e-mail or print invitations for third parties to remit monetary gifts, Hurley added, noting that just like wedding registries, a number of online 529 gift registries now exist.

Tax Issues Linger

The amended New York law falls short of offering generous tax benefits. While New York State residents who are direct account holders are entitled to individual annual state tax deductions of up to $5,000 of contributions ($10,000 for joint filers), there are no tax deductions available for friends or family members, even if they also reside in New York State, confirmed Upromise officials.

That is not the case in Ohio, where third parties are encouraged to freely contribute to a student's Ohio CollegeAdvantage 529 account. Third parties can take a state tax deduction if they also live in Ohio, said Maureen O'Brien, marketing manager of the state-sponsored program. The Ohio program allows for contributions to be made online or through special contribution slips, she said.

Oregon's college savings plan similarly has long welcomed third parties to contribute to a college-bound student's account and also take a state tax-deduction, said Michael Parker, executive director of the plan. Moreover, the Oregon plan encourages students to contribute to their own account from babysitting or paper route earnings, even if they don't pay taxes or would themselves qualify for a deduction, he added.

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