Famed theoretical physicist Albert Einstein once called compound interest “the eighth wonder of the world” — adding “he who understands it, earns it; he who doesn’t, pays it.”
Alabama Treasurer John McMillan often paraphrases that quote when encouraging parents to start saving for their children’s post-secondary education early. That was a big part of his message last month as McMillan made several stops in Mobile promoting Alabama’s “CollegeCounts” program.
CollegeCounts is a tax-advantaged education savings program, which are often called 529 funds in reference to the section of the Internal Revenue Code they fall under. CollegeCounts is managed by Union Bank & Trust, but is overseen by the Alabama State Treasurer’s Office and offers investors special tax benefits.
While there are many private options when creating a 529 fund, which are already exempt from federal taxes, CollegeCounts also allows state tax exemptions when widthrawing money to pay for things like tuition, school fees, books, computers, room and board and other “qualified educational expenses.”
There are currently around 95,000 CollegeCounts accounts with a combined investment of nearly $2 billion, and McMillan said he expects those numbers to keep growing. Speaking with Lagniappe, he noted there’s no cost to open a new account and there is no minimum investment requirement.
For new and expecting parents, he said it’s never too early to start investing in a child’s education.
“I always emphasize the importance of getting started early, making regular contributions and taking advantage of that compound interest,” McMillan said. “Even if it doesn’t cover the full cost of a child’s college education, it can still help. Look at the student debt you see now … the average in Alabama is somewhere around $31,000. So, whatever it is, those contributions will surely help down the road.”
In addition to the tax exemptions, anyone contributing to a CollegeCounts fund — whether they’re the parents of an account holder or not — can claim those contributions as an annual state income tax deduction, up to $5,000 annually for single filers and up to $10,000 a year for married couples filing jointly.
The money in a CollegeCounts account can be used for any qualifying expenses at private, public or vocational schools whether they’re in Alabama or not. There are also no restrictions on moving the account from one beneficiary to another, in case one child decides not to attend college.
While the program has continued to add investors, it was also launched after the Alabama Prepaid Affordable College Tuition (PACT) Program came close to collapsing in the late 2000s after losses in the market and tuition increases left the program hundreds of millions of dollars in the red.
The state hasn’t sold new PACT contracts since 2008, and with a bit of help and funding from the Alabama Legislature, the program’s board of directors has been able to stabilize its finances. It has routinely been able to increase the benefit payments PACT holders will ultimately receive.
Unlike PACT, which had defined benefits that were intended to help parents avoid tuition increases in the future, CollegeCounts is simply a savings program similar to a 401(k) — investors put money into the account, specify how it’s invested and then reap whatever returns those investments produce.
“I try to stay away from talking about [PACT] because it still has some negative connotations, but as a result of that, the state had to come back to the drawing board and tried to put together the best of what everybody else was doing,” he said. “And this program has really got some pretty unique advantages.”
More information about the CollegeCounts program can be found at collegecounts529.com as well as on the state treasurer’s website: treasury.alabama.gov/collegecounts-scholarship.
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