Increasing interest in saving

For a couple of weeks I've been setting aside news tidbits about college savings, and considering the size of said pile, it's time to share what's new with you. Spring, after all, is when high school students are eagerly receiving college acceptance letters.

And parents? Well, let's just say they're dreading the financial aid letters that are also landing in mailboxes. It's no wonder: A new report from the Minnesota Office of Higher Education revealed that Minnesota's students pay more than the national average for a postsecondary degree.

The rising cost of a college education is cause for concern around the country. A new report from Oppenheimer Funds reveals that the vast majority of parents doubt they'll achieve their college savings goals despite the fact that paying for higher education is a priority right up there with retirement planning.

Surprisingly, just one in five current or future savers uses or plans to use a 529 college savings plan. Those are the tax-advantaged accounts that allow tax-free withdrawals for qualified college expenses. The reason? Respondents don't like the idea of locking the money in an account that would penalize them for withdrawing money for something other than college costs, Oppenheimer found.

The most popular college savings tool is a plain old savings account. The other accounts you hear about for college savings -- the so-called Coverdell or education IRA and minor's trust accounts -- each attract just 4 percent of college savers.

More than two-thirds of the study participants said that federal and state tax deductions would motivate them to save for college. Minnesota is among the 17 states that don't offer such a deduction. However, Rep. Erik Paulsen, R-Eden Prairie, has introduced a bill to change that. His proposal even makes contributions to a 529 plan sponsored by any state tax-deductible.

Though the measure didn't make it far last session, Paulsen said he plans to push for it again this year. "Given the downturn in the economy ... and the high costs of tuition, this is a perfect opportunity to engage in finding additional incentives to save for college," he wrote in an e-mail.

Currently, the state offers a matching grant of up to $400 for participants in Minnesota's 529 plan, called the Minnesota College Savings Plan, for Minnesota beneficiaries whose parents have an adjusted gross income of no more than $80,000. For example, a family with adjusted gross income of $75,000 that contributes $2,500 would receive a 10 percent matching grant, or $250. Families earning $50,000 or less would receive a 15 percent matching grant per account beneficiary.

The deadline to apply for 2007 grant contributions is May 1. By Jan. 28, 6,853 matching grants totaling more than $1.5 million in additional college savings funds had been awarded.

Minnesota's 529 plan, managed by TIAA-CREF, had a tough 2007, according to the latest performance rankings from college savings information mecca Savingforcollege.com.

The plan placed 41st out of 49 ranked plans sold directly through the states, not through brokers. Of course no investment decisions should be made based solely on a single year of performance. The Minnesota plan is ranked eighth for three-year performance.

People are more interested in an 18-year time horizon," said Andrew Gradus, director of institutional advisory services at TIAA-CREF. He blamed the off year on real estate investment trusts, or REITs, which typically invest in commercial real estate.

Gradus said most 529 plans don't use REITs, but TIAA-CREF uses them in some of Minnesota's allocations because they have improved diversification and enhanced returns over time. Through mid-March, the asset class was outperforming the broader domestic stock market, although still negative year-to-date.

The Minnesota College Savings Plan offers six options, all of which perform differently depending on market conditions. But it's safe to say that since inception, returns have been in positive territory for all but the balanced option introduced last summer. Performance specifics and more can be found at www.mnsaves.org.

Kara McGuire • 612-673-7293 • kara@startribune.com