College Savings Plan Gets Simpler in New York State

Like many college graduates, Judith Le, 24, is in debt.

"Considering I'm about to go to law school and then enter the nonprofit sector, I have no idea how I'm going to pay it all off," Ms. Le, who graduated from New York University owing $30,000, said. "By the time I'm all done with school, I'll have six figures worth of debt."

Now New York State is seeking to alleviate the lingering costs of higher education. A new law, signed by Governor Paterson last month, allows more people to contribute to college savings plans.

In the past, only the account holder, usually a parent, in the state's 529 College Savings Program could deposit funds. Under the new law, relatives, employers, and friends can chip in.

The 529 College Savings Program allows college students to take income tax deductions of up to $5,000 on contributions they make to the fund, and all the money withdrawn from the accounts is tax-free if it is used for qualified educational expenses, including tuition, room and board, books, and computers. Using the funds for anything other than educational purposes makes them subject to state and local income taxes and a 10% federal penalty tax.

Legislators say they hope the new law will lessen the debt college graduates often incur.

"College costs are rising way above the rate of inflation. This makes it possible for our children to go to college without huge loans," state Senator Hugh Farley, a Republican who sponsored the bill in the Senate, said in an interview. The new law "broadens the base of who can contribute to a 529: grandparents, uncles, friends, anybody. This is the best way for a relative to contribute on a birthday, special day, or holiday of any sort for this youngster."

Still, the new law will not work for every student, Ms. Le said. "I think 529 accounts could help, but that's based on the assumption that families have the ability to save and invest that type of money," she said. "For many people, that's not a viable option."

The director of financial aid at Queens College at the City University of New York, Rena Smith-Kiawu, said the program has not received enough publicity to be used by a substantial majority of entering college freshmen. "The program needs to be advertised more from all areas, not just from college campuses, so that families are aware that they can put aside tax-free money for their child," she said.

A study conducted by Massachusetts-based Cogent Research LLC found that 39% of parents planning on saving for college are aware of 529 plans.

Ms. Smith-Kiawu said she sees publicity as especially necessary when one considers the benefit of an early start to saving. "Parents should start putting away money when their kids are in elementary school," she said. "That way when the child enters college, the money is there to tap into."

While acknowledging that the program is not perfect, legislators said it will make a dent in the financial burden of higher education.

"As a parent of a college student, I know firsthand how the rising cost of higher education is affecting New York students and families," Mr. Paterson said in a statement. "This new legislation will make it easier for students to save for their education by allowing grandparents, generous employers, scholarship funds and other third parties to make donations into college savings accounts."