Board Pushes Tax Incentives For Saving For College

The state Board of Education is asking the Legislature to provide tax incentives for residents to save for college long before enrolling.

For years, the cost of a college education has grown faster than the rate of inflation. The average graduate of an Idaho college or university leaves school more than $15,000 in debt, legislative analysts report.

Board staff member Mike Killworth said regents decided last fall that providing some incentive to save money for college could help increase enrollment.

The pre-filed measure would allow for post-secondary savings accounts. Taxpayers could deposit up to $5,000 per year, and the money would not be included as taxable income.

“A number of other states are doing similar things,” Killworth said, although some allow prepaid tuition to the schools rather than savings accounts and tax deductions.

Eighteen states have approved savings accounts or prepaid tuition, according to statistics from the College Savings Plans Network, sponsored by the National Association of State Treasuries.

Killworth conceded that creating an account system is a “very cumbersome and tricky thing to do.” But, he said, because the bill is similar to a medical savings account law passed by the Legislature, the state board’s measure has a good chance. “We pretty well modeled the college savings accounts on the medical savings accounts,” he said.

Any person could establish an education account in the name of a spouse, child, grandchild or sibling. A husband and wife could create separate accounts and take two deductions on their taxes.

Killworth also said the $5,000 figure is an arbitrary one selected by the board and could be changed by lawmakers.

Similar legislation was pushed in 1995 when student lobbyists promoted a plan to give parents a tax break for setting up education accounts for their children.

During the same session, state Treasurer Lydia Justice Edwards proposed a bill that would have allowed parents to pay into an account that would be applied toward a child’s tuition at an in-state college or university.

Under the new proposal, funds could be withdrawn for any “eligible post-secondary educational expense,” including fees, books, equipment and room and board.

But if funds were withdrawn for any other purpose, the account holder would pay a penalty of 10 percent of the amount of the withdrawal. That money also would become taxable income.

A study by legislative accountants indicates the state would lose some revenue if the proposal passes.

Assuming the average annual deposit to an account is $2,000 and the account holder is in a state income tax bracket of 8 percent, the annual revenue lost per individual would be about $160.

Nearly 18 percent of Idaho high school students graduate from college - about 3,750 per year.

If 25 percent of those were supported with college savings accounts, the total revenue loss to the state each year would be about $150,000.

If approved in the upcoming legislative session, the legislation would go into effect next January.

In tax legislation signed by President Clinton last August, the so-called Hope scholarship tax credit to defray tuition and other college expenses is a maximum $1,500 credit for the first two years of college, effective for tuition paid after Dec. 31, 1997.

For the second two years, the so-called Lifetime Learning tax credit, effective for tuition paid after June 30, 1998, is a maximum credit starting at $1,000 and increasing to $2,000 after 2002.

Credits start to be phased out for individuals earning $50,000 and couples making $80,000 a year.