.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} Whenever Michael Fitzgerald tells parents about the College Savings Iowa program for the first time, their response is almost predictable, says Iowa’s state treasurer.

“They say, ‘Gee, why didn’t I find out about this sooner?’ and ‘Where do I sign up?'” Fitzgerald said.

It looks like a lot of people have had that same reaction. Since its inception 12 years ago, College Savings Iowa has attracted nearly $2.2 billion in investments from more than 180,000 participants.

Administered by the Iowa Treasurer’s Office, the program enables parents and grandparents, and even friends or other relatives, to open an investment account that will accumulate tax-free to pay for a child’s college expenses. The money saved remains non-taxable, provided it is used to pay for qualified expenses such as tuition, books and fees at any U.S. college.

Despite the lingering effects of the recession, “we continue to grow in the number of folks that are investing, and in the number of accounts that we have,” Fitzgerald said. “Now, the market values of the assets last year sunk, like everybody’s did, but they’ve come back very nicely. Right now, we’re at the highest level we’ve ever been in value of cash assets and accounts.”

After increasing by more than $366 million by year-end 2007 to total invested assets of more than $2 billion, total account values dipped below 2006 levels to $1.67 billion at the end of 2008, which provided a reminder to participants that investment returns are not guaranteed. By the end of last year, total account values rebounded to more than $2.16 billion.

More predictably, the program is experiencing more withdrawals each year as participants begin taking out money for college. Last year, participants withdrew nearly $459 million from their College Savings Iowa accounts for college expenses.

Iowa’s program, which offers 13 investment fund options managed by The Vanguard Group Inc., has been recognized by Newsweek, Time and Money magazines, as well as Kiplinger’s Personal Finance Magazine and other money management experts as a top choice among state-sponsored college savings plans. They’re also known as as 529 plans, for the section of the Internal Revenue Code that established them.

Iowa’s 529 plan is administered by Upromise Investment Advisors LLC, which in 2006 was acquired by SLM Corp., the servicing company for federally guaranteed college loans that’s better known as Sallie Mae.

Most recently, Clark Howard, a CNN Headline News consumer advocate, gave College Savings Iowa his top recommendation of “dean’s list with high honors,” along with Utah’s and New York’s 529 plans “because of their extremely low costs.”

Overall, 529 plans have become more competitive, Howard said, because plan administrators have found it more difficult to get parents to contribute. “That has led to an old-fashioned market share war among the various plans with management fees dropping in state after state,” he wrote in his online column.

Significant opportunity

As college costs continue to soar, more people than ever are saving for their children’s college education, not just in Iowa but all over the country. The college savings market, estimated at the end of 2009 at $486 billion in invested assets, will nearly double over the next five years, according to a recent study by Financial Research Corp., a Boston-based consulting company.

About 20 percent of those college savings assets are held in state-administered 529 plans, which represents “a significant opportunity for the (529 plans’) expansion,” the firm concluded in the report, released in January.

The growth will come from a combination factors, including new account openings, additional contributions to existing accounts and increasing values of the underlying investment funds, said Bridget Bearden, a college savings research analyst with FRC who authored the report.

“It’s more driven by new account openings,” Bearden told the Business Record. She estimates that 529 accounts, which numbered 9.1 million at the end of 2008, will increase to 12.2 million by 2014. Upromise, which administers 529 plans for a number of states, will continue to be a a key driver of that growth through a variety of value-added services it provides to plans, she said.

Successful 529 plans are offering services to attract young professionals to invest, Bearden said, among them low-cost index funds and the ability to access their plans online.

“College Savings Iowa has a lot of services that appeal to the younger Gen X families that have a considerable income and manageable levels of debt,” she said. “So in addition to appealing to more families that are well off, it’s also appealing to more people accessing plans online.”

Iowa is among the majority of states that offer a tax incentive for residents to invest in their home state’s 529 plan. Currently, Iowa taxpayers can deduct up to $2,811 per beneficiary account from their adjusted gross income on their state tax return.

However, College Savings Iowa’s low fees relative to other state-sponsored college savings plans have made it equally popular with non-residents. Nearly half of the investment accounts are owned by out-of-state residents, whose contributions make up approximately two-thirds of the total dollars invested. (see pie charts)

Attracting a large base of out-of-state investors provides an advantage to Iowa investors, Fitzgerald said.

“Because of the law of large numbers, we can manage $2 billion just as easy as we can manage $700 million (the amount invested by Iowa residents), and because of the larger scale, we can do it cheaper,” he said. “So as our program has grown, we’ve been able to bring the cost of College Savings Iowa down.

“When we started, we were charging 65 basis points, or $6.50 per $1,000 – which is dirt-cheap,” Fitzgerald said. “But as this program has grown, we’re down to 50 basis points. And we think that within the next year we can lower it even further.” By comparison, the national average for 529 plan fees is 69 basis points.

Another carrot for participants: cash rebates to their accounts for buying groceries and other items with their credit cards through a program offered by Upromise. About 20 percent of account holders have enrolled in that program, with about $5.2 million in rebates added to their accounts over the past five years.

Iowans may also begin hearing about College Savings Iowa through their financial advisers. In 2007, “the legislature asked us to implement an adviser-sold program,” Fitzgerald said, “because there are a lot of folks out there that, unless their broker says to buy it, they won’t buy it.” The Iowa 529 Advisor Program, managed by UPromise, has 16 investment fund options and carries a higher management fee.

Nationally, 47 percent of 529 plan assets were made directly by participants as opposed to through a financial adviser as of the end of 2009. FRC forecasts that direct investments by individuals will represent the majority of 529 assets by 2012.

No. 1 option

West Des Moines-based wealth management firm Syverson Strege & Co. is a “very strong proponent” of College Savings Iowa for its clients, said Brian McKibban, the firm’s chief operating officer for financial planning.

“That is the No. 1 option that we discuss with people in doing that,” he said, based on a comparison of Iowa’s plan with other states’ 529 plans several years ago. Because it is a fee-only firm, Syverson & Strege cannot sell the adviser plan and recommends direct purchases to clients.

Having a well-managed college savings plan available, particularly one that emphasizes age-based accounts that grow more conservative as the child approaches college age, helps to take the emotion out of the process, McKibban said.

“It’s a very touchy subject to save for,” he said. “People tend to be more conservative with their education investments, because of the nature of what they’re saving for and the short time frame in which they have to save.”

In weighing a 529 plan against other vehicles for college savings, the 529 has the fewest drawbacks, McKibban said. For instance, the Coverdell Education Savings Account program is relatively difficult to understand and limited to annual contributions of $2,000 per child, he said. And a parent who decides to fund a trust through the Uniform Gift to Minors Act risks seeing their child decide to use the gifts for non-education expenses once they reach the age of majority, which for Iowa is 18, he noted.

Another option for some families may be to fund a Roth IRA, as a distribution for education purposes qualifies as an exception to the 10 percent early withdrawal penalty, McKibban said. This approach “would allow all earnings growth to be tax-deferred and the account balance would be exempt from financial aid calculations,” he said. However, the strategy is only available to individuals with earnings of less than $120,000 or couples making less than $177,000, he said.

McKibban said the biggest potential drawback to a 529 plan is the possibility of over-funding an account. That could mean paying taxes on the earnings and a 10 percent penalty if it’s withdrawn for non-college reasons, rather than transferring the account to another child.

“So we may fund College Savings Iowa from birth to age 10, and then step back and evaluate,” he said. “So it really pays to look at your goal, and what are the consequences if something’s left over at the end of the day.” Correction: The original posting and printed version of this article used a misstated amount for the College Savings Iowa program fee. The correct fee is $6.50 per $1,000, or 65 basis points.