is the Vermont Higher Education Savings Plan?
The Vermont Higher Education Savings Plan is a state program
that provides tax incentives to encourage Vermont families
to save for college or other postsecondary training. The
plan was approved by the Vermont Legislature and signed
by Governor Howard Dean during the 1998 legislative session.
will run the program? When does it start?
The plan will be administered by the Vermont Student Assistance
Corporation, a public, nonprofit corporation established
by the Legislature in 1965 to provide Vermonters with the
information and financial resources they need to pursue
education or training beyond high school. VSAC expects to
start taking deposits in the plan in the year 2000.
will the plan provide?
The plan will provide two savings options: a low-risk program
with a predictable return and a higher-risk program with
the possibility of greater returns or losses. The low-risk
program will be administered by VSAC; the higher-risk program
will be administered by TIAA-CREF, a leading national financial
much can I contribute?
The plan will accept deposits as low as $25 a month. The
maximum allowed in an account will be revised annually by
VSAC's board of directors and cannot exceed the current
amount needed to finance up to five years of tuition, fees,
room, and board at the highest-cost U.S. institutions. The
maximum for the 1998-99 academic year was $155,000.
much will the plans earn?
Returns in the low-risk program are likely to be somewhat
higher than earnings in a typical savings account in a bank.
The precise rate will be at least that of the 91-day Treasury
Bill. The higher-risk choice will offer less predictable
earnings through a vehicle such as a mutual fund. State
and federal tax incentives will boost the effective yield
on both types of plan.
do the tax incentives work?
Deposits made into the plan will be "after tax" and therefore
not deductible. However, earnings will grow Vermont tax-exempt
and federally tax-deferred. Federal taxes will not be due
until savings are actually withdrawn to pay higher education
expenses. At that point, the earnings will be taxed at the
student beneficiary's rate, which is likely to be lower
than the tax rate of the person who contributed to the plan.
there other advantages?
Yes. Using the Vermont plan will not prevent an eligible
family from also claiming the federal government's new Hope
and Lifetime Learning tax credits. (In contrast, federal
law prohibits tax-free withdrawals from the new Education
IRA and use of the Hope or Lifetime Learning credits in
the same year). Are there any disadvantages? A family cannot
contribute to the new federal Education IRA and the Vermont
savings plan in the same year. (However, while the Education
IRA limits savings to $500 per year, the Vermont plan has
only the $155,000 cap described previously). As is the case
with other investments that receive tax benefits, savings
withdrawn early, or used for purposes other than higher
education expenses, will lose their tax benefits and be
subject to penalty of 10 percent of the earnings.
can the plan be used?
Savings from the Vermont plan can be used to attend any
college, university, vocational school, or other postsecondary
institution that is eligible to participate in the student
aid programs administered by the federal Department of Education.
This includes most U.S. schools and some abroad.
is eligible to use the plan?
Anyone using the plan must have a Vermont "connection".
For example, a Vermont resident -- say a parent or grandparent
-- may use the plan to save for a child, regardless of the
child's residence. A non-resident may use the plan to save
for a child who is a resident of Vermont. Once a plan is
set-up, it may be continued even if the participant or beneficiary
moves away from Vermont.
owns the account?
Initially, the account is owned by the person who establishes
and contributes to the plan. The account reverts to the
beneficiary once that person is able to use the money for
qualified postsecondary expenses. If the beneficiary is
unable to use all or part of the money saved, it can be
transferred without penalty to another beneficiary.
saving reduce my family's eligibility for grants or other
Your eligibility for aid will depend on your family's financial
circumstances at the time your child enrolls in school.
It is always difficult to predict what those circumstances
will be, particularly if college is still a long way off.
Because saving will increase your available resources, it
is possible that you will be eligible for less in grants
or other gift aid. However, it is much more likely that
saving will reduce your need for loans -- the usual way
students and families cover most higher education expenses
today. Because loans are repaid with interest, they are
a costly way to pay for college. Also, money saved through
the Vermont plan will be treated by VSAC as a parent (rather
than a student) asset, so less of it will be "assessed"
when your family is considered for aid. Furthermore, we
believe that a grandparent -owned account would not even
appear as an asset.