Starting Wednesday, the city will set aside
The initiative, announced at Mayor
The city, however, is not routing
Instead, Bremer will pay a near-zero interest rate comparable to that found in a checking account.
On its website for the program, the city says: “Families can contribute additional money and watch their college savings and dreams grow along with their child over time.”
But the potential difference between saving with the city and investing in a 529 plan is massive:
— By summer 2038, when the program's first class of students heads off to college, the city will have made around
— In a savings account paying 0.03 percent per year — the rate Bremer offers its regular customers — that money would grow by about
— Had the city instead invested in a 529 plan, assuming a total return of 7 percent per year, the initial
The actual difference in that scenario likely would approach
Besides the growth potential, parents who add their own funds to the city-run account will miss out on a state income tax incentive worth up to 50 percent of their annual contribution to a 529 plan.
“If I were putting it together, I'd try and piggyback on the 529,” said
BANKER-LED TASK FORCE
Mayor Carter got the college-savings idea from a friend,
That task force included seven employees of four local banks and credit unions, including
The state's 529 plan was not represented.
Nonetheless, Mulholland said, “We debated the 529 pretty thoroughly. They're a super program and can and will complement these custodial accounts, for sure.”
Bremer, which has experience with college-savings matching programs, pledged
The city is not paying the bank for its participation, and the city has said its account holder may not use program records to solicit business from residents.
“We're in this project for the community impact,” said
529s AND IMMIGRATION
Mulholland said the trouble with 529 plans is they have to be connected to a
“If we really want to serve everyone in our community … that notion of a portion of our population being left out was not acceptable to us,” Mulholland said.
A consultant who designed a child-savings program under consideration in
Because the city or county would own the account on behalf of the children, it would “not need to name beneficiaries or provide taxpayer identification numbers,” according to their
Mulholland said the
According to the city, however, the funds can be spent at “private colleges, public universities, community colleges, vocational training or trade schools,” all of which also work with 529 plans.
A third factor was familiarity and access: Most Americans don't know what a 529 plan is, and the 20 percent of
“The key factor in making this recommendation is the greater accessibility of savings accounts over 529 college savings accounts for low-income families,” the task force wrote.
Children's savings accounts nationwide have struggled to persuade families to invest their own funds, whether they use a 529 plan or not.
Although the state's 529 plan was not included in the city's task force, the parties have talked about the project, said
Mandler said TIAA is “there to support the initiative in any way possible,” but he has no problem with the city's decision to use custodial savings accounts.
“That, in and of itself, is of value,” he said.
In its program design blueprint, the nonprofit says savings accounts are familiar and easy to understand, which is an important factor for less financially-savvy families.
However, “a major trade-off … is that the interest rates are usually very low or even nonexistent, while 529s generally have a significant rate of return … and savings in the account grow tax-free.”
Across the country, college-savings programs have worked to overcome the drawbacks of the 529 plan in order to take advantage of their growth potential and tax incentives.
In some Indiana communities, foundations and local banks are facilitating contributions to the 529 plan. Grocers are helping, too, with shopping rebates that are deposited in the college accounts, making it easy for lower-income people to participate.
State lawmakers and the
“The hope of the (children's savings account) is to serve as a pilot for the rest of the state,” state Rep. Kaohly Her, DFL-St. Paul, said at a hearing for her bill providing matching grants for the program.
Nationwide, about half the comparable programs use custodial savings accounts, but the larger ones generally employ state 529 plans, said
“It makes sense; it's a state apparatus. It's kind of the only vehicle that's going to reach statewide,” she said.
That's a key reason
“Thinking about scale, there is no financial institution that has a footprint everywhere,” said consultant
In Indiana, the selection of the state's 529 plan over a local bank has made it easier to grow to additional cities and counties, according to a paper from
Elliott's paper painted
“It transforms what is currently a largely regressive, but widely-available, financial instrument — the 529 — into what some (children's savings account) champions have long believed it can be: a valuable platform for universal and progressive asset interventions,” he wrote.
There are no tax incentives for saving for college inside a savings account. However, because the College Bound accounts are being held by the city, the funds should not hurt a family's ability to secure need-based financial aid.
For better or for worse, both types of programs limit families' access to the funds for purposes other than college.
In a 529 plan, a recipient pays income taxes plus a 10 percent penalty for withdrawing funds for non-qualified purposes.
His colleague at
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