A state audit of Wisconsin’s college savings-bond program has highlighted concerns that such programs may be of more benefit to wealthy investors than to middle-class families seeking to set aside money for their children’s education.
A growing number of states have turned to college savings-bond programs as problems have arisen with the tax status and cost of prepaid-tuition plans. (See Education Week, Nov. 8, 1989.
But savings-bonds programs will only be effective in meeting their educational goals, the Wisconsin audit suggests, if states make the effort to design and market them to appeal to families with children.3
The audit was undertaken at the request of several state legislators, who were responding to widespread public criticism of the state’s sale in April of the first issue of the bonds, which are exempt from both federal and state taxes.3
Lawmakers said they had heard dozens of stories from constituents unable to take advantage of the sale, even though the state had set the minimum purchase at $1,000 in order to make it easier for middle-income families to participate.
The state did little to promote the sale in rural areas, critics said, and reports surfaced that bond houses had called their preferred customers--whether or not they had college-bound youngsters--prior to the sale.
Typical of the problems was that encountered by one of the sponsors of the audit, Representative Leo Hamilton. When Mr. Hamilton tried to buy bonds for his five grandchildren, the local bank refused because he did not want to buy a minimum of $10,000 worth of bonds for each child.
“This clearly was in violation of the intent of the legislature,” Mr. Hamilton argued.
The audit revealed that 46 percent of the purchases, which totaled $65.9 million, were for $5,000 or more. At least 21 people purchased more than $50,000 worth of bonds, at an average of $104,000, auditors said, noting that the actual figures were probably higher because they could gather information on only 30 percent of the bonds.
“We did not call it an abuse that individuals bought those amount of bonds,” said Patrick W. Cooper, who conducted the audit. “But the over all public reaction, it would be fair to say, was to call it an abuse.”
Analysts said the problems dis cussed in the Wisconsin report could be found in other states as well.
“The drawback to any of these plans is they tend to be used by up per-middle-income folks who have the money set aside,” said Arthur Hauptman, a higher-education con sultant. “My expectation is that if other states [audited], they’d prob ably come up with the same thing.”
The Wisconsin sale was “no differ ent than the other programs,” added Christine R. Paulson, a policy ana lyst with the Education Commission of the States. “Maybe they just looked at it more closely.”
At least 22 states have issued col lege-savings bonds or passed legisla tion calling for an issue, Ms. Paulson said.
The California legislature last month approved a bill creating a savings-bond program specifically limited to educational purposes, but the bill faces a possible veto by Gov. George Deukmejian. In a related move, State Treasurer Thomas W. Hayes last week launched a savL ings-bond program without legisla tive approval.
While it probably would not be feasible for savings-bond programs to exclude wealthy investors from participating or require by law that such bonds be used for educational purposes, Ms. Paulson said, the best programs are those that cast the in vestor net as widely as possible. To do that, she argued, states need to advertise and market on a broader basis and offer bonds at low mini mums, such as Wisconsin’s $1,000.
In Connecticut, officials made a major effort to reach those not usual ly targeted by high-yield-bond sales. The state treasurer’s office sent a million fliers home with elementary and secondary students to inform parents, grandparents, and others of the state’s first college savings-bond sale in December 1988, said Kath leen Palm, a spokesman for State Treasurer Francisco L. Borges.
Of a sample of Connecticut buyH ers, 85 percent said they intended to use the bonds for education, while 70 percent said they had never purL0 chased a bond before.
To make their bonds more accessible during Wisconsin’s second sale in November, state officials there have adopted guidelines that limit the size of orders, extend by a day the chance to make small orders, and call for a review of bond sellers. The state also is working to improve distribution in rural areas.
Meanwhile, a number of states are continuing to go ahead with prepaid-tuition plans, which allow parents or other benefactors to pay a sum that will cover future tuition at a state postsecondary institution.
Alabama and Ohio this year joined Wyoming, Michigan, and Florida in offering prepaid tuition, Ms. Paulson said. And Georgia and Alaska passed legislation authorizing such a program, joining Missouri, Oklahoma, West Virginia, Tennessee, Indiana, and Maine.
Ms. Paulson noted, however, that the latter three states were rethinking their plans in light of unfavorable rulings by the Internal Revenue Service.
The irs dealt prepaid plans a substantial setback in 1988, when it ruled that the Michigan Educational Trust--the pioneer among such state plans--would have to pay federal taxes on its earnings. The federal agency also said that students would probably be required to pay taxes on the earnings of their contracts when they were redeemed.
The Michigan plan also came under fire this summer from a University of Michigan tax-law professor, who warned in a report that it could be financially unsound. The program, adopted in 1986, has sold more than 49,000 contracts for more than $300 million.
Jeffrey S. Lehman said the met will need either a taxpayer bailout or a break from the irs to escape insolvency. He questioned assumptions by met officials that tuition costs would rise less rapidly in the future than in the past 20 years, and that the plan would not be taxed on the income it receives from selling contracts.
