Monday, June 11, 2001

savings account
critics fearful of
a downside

Some argue the tax exemptions
are really a disguise for
private school vouchers

How will they work?

By Treena Shapiro

Cindy Wu likes getting the chance for a tax break on savings for a private-school education.

Wu, who has two children in the Star of the Sea Early Learning Program, says, "Let's face it, private school is expensive now."

Wu said she was particularly attracted to being able to choose whether to withdraw funds for private school or let the capital and interest build up until her children enter college. "I guess I have the option of using it now or later or both," she said.

But education officials are reserving judgment until they see if there are any strings attached.

Starting next year, parents will be able to contribute up to $2,000 a year to tax-exempt Education IRAs to pay for their children's education from kindergarten through college.

By expanding these education savings accounts to apply to elementary and secondary schools, the federal law will primarily benefit private-school students.

The change comes as part of President Bush's tax package, passed by Congress last month. Now, Education IRAs cap at $500 a year per child and can only be used for college.

Val Iwashita, headmaster of Iolani School, said that on the surface the changes are attractive. "It certainly would allow parents to save for a private-school education and allow them to do so with some tax advantages," he said.

However, he added: "There is a fear of government intervention whenever these tax advantages come forth. I'm hopeful that there are not government regulatory policies being moved forward as well."

The concern among independent schools is that the tax breaks could give the federal government license to include them in national education reforms that would now apply only to public schools.

"There is a fear in the independent school communities that (through taxation and passage of laws) we will over time lose the independence we've enjoyed," Iwashita said.

Viewed by many as controversial "private school vouchers in disguise," critics of the new law are concerned that tax breaks will divert funds from public education.

Greg Knudsen, spokesman for the state Department of Education, said: "It sounds like a voucher to me, or some sort of tax deferral or rebate. It's of the same cut as other devices to divert public funds to private education."

"There's just a limited pool in tax funds, and anything that would reduce that amount would have a negative impact on public education," he said.

According to the latest available figures from the Hawaii Association of Independent Schools, 36,311 children are enrolled in the state's private schools from pre-kindergarten through high school.

Some 183,000 students are enrolled in the state's public education system.

Another criticism of the education savings accounts is that over 10 years they will cost the federal government $63 million in revenue to give tax incentives to those who can afford private school tuition costs, instead of using the money to improve public schools.

Knudsen said in this way they are even worse for public schools than vouchers. "It may have an unbalanced effect ... benefiting the wealthy instead of others who may benefit (from vouchers)."

However, Shirley Sypert, a single mother whose daughter attends Punahou School, is optimistic that the new law will enable less wealthy parents to send their children to private schools.

The savings accounts would allow parents to begin saving earlier to send their children to private school. "I think it's going to give parents a vision for their children's future," she said.

Architect Pravin Desai, who has a son in second grade at Iolani and a daughter about to begin the private school search next year, said that he would be interested in looking into Education IRAs. He pays for his son's $10,000 annual tuition out of pocket.

"After tax you pay for it. It's a big chunk of money," he said, adding that along with tuition come many extracurricular expenses.

But having struggled with the decision to send his son to Iolani instead of a public school, Desai said, "I think we should work on our public school system so that it's a great system and parents won't have to struggle with these ideas."

So although he is grateful for anything that would help with his private school expenses, of the tax break he asked, "If everyone leans toward private schools, what happens to our public schools?"

How will the ESAs work?

By Treena Shapiro

Question: Who can contribute to the education savings account?

Answer: Qualified taxpayers, including parents, relatives, corporations and nonprofit organizations can contribute collectively up to $2,000 per beneficiary each year. To qualify to make the maximum contribution, individual taxpayers must have modified adjusted gross annual incomes under $95,000, and married taxpayers filing jointly must earn under $190,000. The contribution level is phased out for single taxpayers with incomes between $95,000 and $110,000 and married taxpayers with incomes between $190,000 and $220,000. Those earning more than the phase-out levels cannot contribute.

Corporations and other entities can contribute regardless of annual income.

Q: What is the tax incentive?

A: The interest earned on the account is tax-free. Neither the principal or the interest will be taxed if withdrawn for a qualified educational expense.

Q: What educational expenses qualify?

A: Qualified expenses include tuition, fees, tutoring, special-needs services, books, supplies, room and board, transportation, uniforms and computer equipment used for educational purposes.

Q: How does this differ from the current education savings account law?

A: The contribution level will be raised to $2,000 from $500, and withdrawals can be used for kindergarten through 12th-grade expenses, instead of just higher education as under the current law.

Q: When does the new law take effect?

A: The provisions will be effective for tax years beginning Jan. 1, 2002.

Source: Council for American Private Education (

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