THE VERMONT HIGHER EDUCATION SAVINGS PLAN
Questions & Answers

 

What 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.

Who 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.

What 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 services company.

How 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.

How 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.

How 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 Federal taxes will not be due until savings are actually withdrawn to pay higher education expenses.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.

Are 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.

Where 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.

Who 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.

Who 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.

Will saving reduce my family's eligibility for grants or other "gift" aid?
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.