Maine program brightens college prospects – at birth

Just a few days into the new year, Laurie and Keenan Farwell welcomed their daughter Hadley into the world. The hospital staff at MaineGeneral Health in Augusta had the pleasure of delivering not just the baby, but also her first birthday gift: $500 toward her future education.

Hadley is a beneficiary of the new Harold Alfond College Challenge, a first-in-the nation philanthropic program that will give families statewide a $500 starter grant – and assistance with paperwork – to set up 529 college savings accounts for infants.

"It was very exciting to think she's not even a couple hours old, and she's already looking at her college fund," Ms. Farwell said in a phone interview as Hadley patiently sucked on her tiny hand, awaiting a feeding.

Harold Alfond founded Dexter Shoe Co. in Maine in 1958 and shared millions of dollars to promote health and education in the state. After giving many scholarships to college-age students, "he wanted to help build aspirations for college at the front end of life," says Greg Powell, chairman of the board of the Harold Alfond Foundation. Mr. Alfond laid the groundwork for this legacy before he died in November.

While elite colleges have moved recently to replace loans with grants, the high cost of college is still a barrier to many families. As efforts continue to rein in those costs, the Maine scholarship is a creative way to address the other side of the college-debt problem – the dearth of long-range savings.

Other states will be watching the outcome as they look to encourage more participation in their 529 plans, named after a section of the Internal Revenue Code that allows such deposits to grow tax-free. Some groups are even hoping that states or the federal government will consider creating broader child savings accounts that could be used by the beneficiary for any purpose once he or she turns 18.

"It's about changing savings patterns and financial literacy," says Lisa Mensah, executive director of the Initiative on Financial Security at The Aspen Institute, a supporter of child savings accounts. "The power is not the first $500, but how individual kids and their families save over their life."

Maine has traditionally employed many people in industries related to natural resources – everything from fish to blueberries. But as the economy changes, the demand grows for workers with college degrees. About 57 percent of Maine's high school graduates enroll immediately in college, according to the Maine Compact for Higher Education. Nationally, only one-third of parents with middle-school students have started saving for college, the Institute for Higher Education Policy reports.

"Our challenge is changing the culture ... and giving some kind of incentive that says even a little bit you save today will help reduce college debt later," says Karen Vigue, the college savings officer with Maine's NextGen College Investing Plan, the state's 529 system. About 8,000 Maine residents have opened NextGen accounts since the plan started in 1999. That's low participation considering that about 14,000 babies are born in Maine each year.

Alfond's idea sprang from his own $500 gifts to grandchildren and great-grandchildren when they were born, accompanied by a note to their parents encouraging them to start saving. The new program will include information with the accounts' quarterly statements about how families can prepare financially and academically for higher education.

After this year's pilot at MaineGeneral Health's two hospitals, the $500 grants will be available to all babies born or adopted by Maine families, as long as parents sign up by the first birthday. The Harold Alfond Foundation expects to spend $7 million to $9 million a year, if everyone participates.

If a family adds $50 a month to the account and it grows at a rate of 8 percent, it would be worth $25,000 when the child turns 18, according to the Finance Authority of Maine, which administers the NextGen plans. Without additional deposits, the $500 could grow to $2,000. Tax-free withdrawals can be used for any accredited postsecondary schooling, including vocational training or occasional classes.

The $500 grants are available regardless of income. But Maine's 529 also has a matching-grant program for low- and moderate-income families. Such incentives do tend to result in more savings. About 80 percent of account owners who receive matching grants in Maine continue to make contributions, according to a study by Washington University in St. Louis. Researchers also found in interviews that having a college savings plan encourages students to earn better grades and make more educational plans.

To overcome barriers to saving, a partnership of higher education organizations is promoting 529 accounts and the new Alfond grants. People "are afraid to save for a variety of reasons," says Ms. Vigue. "They think that building assets will impair their ability to get some financial aid awards, so we have to do the outreach to bust that myth. There are [also] families who really feel they don't have disposable income to save."

The Farwells might have been one of those families were it not for the Alfond grant. "To have $500 right handy to [open an account] on our own probably wouldn't have been a possibility," Farwell said. "When you're looking at doing all this paperwork for a college fund, that can be very intimidating to people, so if you have help ... you're definitely more likely to get it started."

Maternity-ward staff pair with benefits specialists to explain the account to new and expectant parents. They helped the Farwells fill out paperwork within 24 hours of Hadley's birth.

"It's a great testimony to Mr. Alfond's generosity – I just wish he could have lived long enough to see the program itself started," says Scott Bullock, CEO of MaineGeneral Health.

Because philanthropy can often be a catalyst, Ms. Mensah of The Aspen Institute says the Alfond program is "an exciting first step." She's working with a bipartisan coalition in Mississippi to push for legislation that would make it the first state to offer tax-advantaged child savings accounts to use for any purpose, such as buying a home or starting a business. The United Kingdom started a similar plan called the Child Trust Fund for children born since September 2002.

"What the UK has done is put a whole generation of kids on track to be smarter savers, savvier about investing, and to be really invested in future opportunities," Mensah says.