Tue | Sep 1, 2015

Tax-advantaged education savings plans

Published:Sunday | September 23, 2012

Andrena McMayo, Guest Career Writer

Tertiary-education subsidies represent easy targets for budget cuts, never mind our relatively weak literacy rates and lack of global competitiveness.

Some proposals that I have seen for countering the effect of reduced subsidies include increased student-loan financing and reduced loan rates, means testing for subsidy access and changes in subsidy allocations.

While these recommendations are not bad, per se, they are not necessarily adequate from a government higher-education financing policy perspective. I would, therefore, like to recommend that consideration be given for tax-advantaged savings plans.

Tax-advantaged savings funds usually take two forms: deduction at source before tax, such as individual retirement accounts (IRAs); or tax deferrals on actual savings growth such as long-term savings accounts (LSAs).

Option 1: Tax Exemption on Savings Deductions - In this case, the Government would make amendments to the Income Tax Act, allowing individuals to contribute to approved education schemes up to a maximum with specified beneficiaries.

Option 2: Tax Deferrals on Savings Growth - This would be similar to LSAs which allow for income to grow without being taxed.

options and PENALTIES

Under both options, tax penalties and other rules usually apply on withdrawals for purposes other than tertiary education-related expenses and cancellations.

Tax-advantaged savings plans are different from previous recommendations as they provide a framework which encourages individuals to save for future tuition expenses and, therefore, shifts some of the burden from the state to its citizens.

There is currently a substantial appetite for education savings plans, as evidenced by the level of participation in overseas education plans sold in Jamaica, as well as local education savings plans, which in their current form are education plans by virtue of branding more than behaviour or content.

Tax-advantaged savings plans would also promote early awareness and consciousness around university tuition expenses and the need for savings, simply through the policy focus in much the same way National Housing Trust deductions promote awareness around home ownership and pension deductions around retirement planning. Additionally, the private sector would be stimulated by the prospects of a new product offering and help to raise awareness as companies develop and promote education savings products.

Andrena McMayo is treasurer at Victoria Mutual Building Society. Email andrena.mcmayo@vmbs.com.