ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, September 1, 1996 TAG: 9609030073
SECTION: VIRGINIA PAGE: B-1 EDITION: METRO
SOURCE: PHILIP WALZER LANDMARK NEWS SERVICE
PARENTS will no longer need to worry about rising college costs as they save for their children's education.
For parents of young children already fretting about how to cover tuition in the next century, the state has an offer:
Pay for four years of tuition and fees at close to current rates this year, and worry no more. Once your child gets into college, you won't have to pay another cent.
It's called Virginia's Higher Education Tuition Trust Fund, and it will be available to parents starting in December. Richmond officials are deciding the details, including the pricing structure, which will be announced in November.
``It's good for students because it will reduce their debt burden when they graduate,'' said Elizabeth A. McClanahan, an Abingdon lawyer and chairwoman of the State Council of Higher Education.
``It's good for parents because it encourages savings as opposed to borrowing. It's good for taxpayers because it enhances the affordability and accessibility of higher education for Virginians.''
And a bill signed by President Clinton last Tuesday will make it more attractive as an investment, said Diana F. Cantor, executive director of the trust fund.
For parents, the bill makes all earnings on the tuition payments exempt from federal taxes until a child goes to school.
Virginia's program was approved by legislators and Gov. George Allen in 1994. Virginia will be among about a dozen other states, including Ohio and Florida, offering prepaid tuition plans, said Diana F. Cantor, executive director of the trust fund.
Cantor expects 30,000 families to enroll in the first sign-up period, which will run from Dec. 2 of this year to Feb. 28, 1997. She said she has already received more than 5,000 inquiries by phone this year.
Parents will be able to pay for everything from one year of community college to five years at a four-year college. The payment for a four-year college would cover any of Virginia's state-supported four-year schools.
The payment schedule could vary from one lump sum to monthly payments over 18 years.
The cost will vary depending on the age of the child - the younger the child, the cheaper the price. The middle range will be based on the average tuition and fees at Virginia's four-year schools, plus administrative and investment fees, Cantor said. The average for 1995-96, weighted by enrollment, was about $4,000.
Participation in the tuition program will not guarantee admission to any college, Cantor said. But she said that a high school graduate would virtually be ensured admission to one of the state's community colleges.
Gordon K. Davies, director of the State Council of Higher Education, says that even if lower-income families don't participate in great numbers, they might benefit in the end.
``If there are more people who have taken advantage of this program from middle-income families ..., it could enable us to concentrate student financial aid on the lowest-income students,'' said Davies, who sits on the board overseeing the trust fund.
Cantor said it could also get parents more involved in children's education in the early years and ``encourage our best and brightest to stay in Virginia. It makes it very appealing to go to Virginia schools.''
Virginia delayed offering the plan because of confusion over its tax-exempt status. In the late '80s, the Internal Revenue Service began taxing interest on payments in Michigan's program, the first in the country.
The measure signed by Clinton exempts interest on payments from federal taxes until a student attends college. And the income would be taxed at the student's rate, not the parents' higher rate.
This would make the tuition trust, in effect, a tax-deferred investment, Cantor said.
Virginia's law also exempts the income on the tuition payments from state taxes until the child gets to college, she said.
Don Chance, a finance professor at Virginia Tech, said that for parents, ``it's not a giveaway. It's a little bit of a gamble. ... It's not something you should automatically jump on.''
Whether a taxpayer comes out ahead depends on this question: Will the rate of return on standard investments rise faster that the rate of increase in tuition?
In Virginia, annual increases in tuition and fees for in-state students at many four-year state-supported colleges surpassed 10 percent in the early '90s.
To rein in the increases, Allen won approval for a 3 percent cap on annual tuition increases between 1994 and 1996. This year, the General Assembly approved a tuition freeze through 1998.
If tuition continues to go up only moderately, wouldn't it be better to put your money into stocks and mutual funds? Not necessarily, says Cantor.
``There's peace of mind and security,'' she said. ``It's taken care of, it's finished. You don't have to check the stock tables; you have locked in something you never have to think about again.
``I don't know of any mutual fund out there that will guarantee that you will receive a college education without having to pay anything any more.''
The eight-member board overseeing the tuition trust fund includes the state treasurer and comptroller and private business executives. They have yet to choose fund managers or investment strategies, Cantor said.
For the state, there is also a financial gamble. What happens if tuition soars in the next few decades and the state's investments on money in the trust fund don't keep up?
Cantor said colleges themselves wouldn't have to make up the difference.
But she doubted the state would ever get in a bind. The prices in the fund will change annually. So big jumps in tuition would be offset by increases in trust fund payments, she said.
Despite his warnings, Chance, the Tech professor, said, ``I have to applaud the state for trying to use innovative financing. This is what private firms do a lot.''
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