CRS Reports on Pluses and Minuses of QTPs

                      December 17, 2001

[1] Congress has tried to make higher education more affordable through favorable tax treatment of qualified tuition programs (QTPs) at Section 529 of the Internal Revenue Code. QTPs allow individuals to save for qualified higher education expenses at eligible institutions. One type of QTP -- prepaid tuition plans -- enables account owners (e.g., parents) to make payments on behalf of beneficiaries (e.g., their children) for a specified number of academic periods or course units at current prices. Prepaid tuition programs thus provide a hedge against tuition inflation. Only states had been permitted to sponsor tax-exempt prepaid tuition plans until P.L. 107-16 extended sponsorship to private institutions effective in 2002. States remain the sole tax-exempt sponsor of the other type of QTP, college savings plans. Generally, funds in college savings plans can be used toward a variety of qualified expenses at any eligible institution regardless of which state sponsors the plan or where the contributor resides. In contrast, funds in state-sponsored prepaid plans typically are meant to cover tuition and fees at public postsecondary schools within the state. Also unlike prepaid plans, in which the intent is that pooled contributions are invested to at least match the increase in tuition, each owner of a college savings account usually can select one of a number of investment strategies (e.g., aggressive growth) in which to place contributions. Consequently, college savings plans offer the possibility of greater returns than prepaid tuition plans, but they also could prove more risky.

[2] Both types of QTPs have several features in common. Contributions are not deductible on federal tax returns. Earnings accumulate tax-deferred until withdrawn. If they are used to pay college expenses, the earnings are tax-free effective 2002 for state programs and 2004 for private programs. Before those dates, earnings withdrawn to pay college expenses are taxable income to beneficiaries. Withdrawn earnings that are not used toward qualified expenses (e.g., the beneficiary does not attend college) are taxable to the distributee (e.g., account owner) and are subject to a penalty. Account owners can escape the tax and penalty if they designate a new beneficiary who is related to the original beneficiary. Although neither account owners nor beneficiaries were allowed to direct the investment of QTP contributions and earnings, that restriction -- considered a major drawback of the plans -- was loosened recently. QTP contributors, rather than beneficiaries, maintain control over the invested funds. Nonetheless, payments to the plans are considered completed gifts, which generally are removed from the contributor's estate. In addition, a special gifting provision allows a contributor to make 5 years worth of tax-free gifts in 1 year to a QTP beneficiary.

[3] Saving for college, through Section 529 plans or other vehicles, may adversely affect eligibility for federal student aid. This is unlikely to affect the decision of higher income families to use QTPs because their offspring are less likely than those of other families to qualify for aid. The lack of income limits on QTP contributors combined with the greater propensity of higher income families to save, their higher marginal income tax rates, and the estate/gift tax treatment of QTP contributions increase the likelihood that wealthy families will be relatively frequent users of Section 529 plans.

Contents

An Overview of Section 529 Provisions

[5] At the same time, the cost of higher education has been rising to a greater extent than family income. The average cost to students of tuition and fees between the 1989-1990 and 2001-2002 academic years increased by 8% per year at 4-year private colleges, by 10% per year at 4-year public colleges, and by 9% per year at 2-year public colleges.² In contrast, average family income rose by 5% annually between 1989 and 2000, according to data from the U.S. Bureau of the Census.

[6] In response to these trends, Congress has enacted a panoply of tax benefits meant to encourage human capital development by increasing the affordability of postsecondary school attendance. Among the tax incentives to promote higher education initiated or amended by such legislation as the Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647), the Taxpayer Relief Act of 1997 (P.L. 105-34) and the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) is the qualified tuition program (QTP) or Section 529 plan, named for its section in the Internal Revenue Code.

[7] This report provides an overview of Section 529 provisions. It includes a discussion of the interaction of QTPs with other tax incentives for postsecondary education and with financial aid for students.³ The relationship between tax-based measures to make higher education more affordable and the traditional student aid system could well be considered during reauthorization of the Higher Education Act in the next Congress.

An Overview of Section 529 Provisions

[8] A few states sponsored QTPs several years before the Small Business Job Protection Act of 1996 (P.L. 104-188) clarified their federal tax treatment at Section 529 in the Internal Revenue Code. Most recently, the tax-advantaged college savings vehicle was substantially amended by the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16). In order to comply with the Congressional Budget Act of 1974, however, P.L. 107-16's amendments to Section 529 and many other provisions in the Code sunset for tax years beginning after December 31, 2010. The sunset provision introduces an element of uncertainty for individuals considering whether to contribute to a QTP on behalf of persons who will be attending postsecondary institutions in 2011 or thereafter. Absent congressional action, Section 529 will revert to its pre-P.L. 107-16 version in tax years starting on or after January 1, 2011. For this reason, the following overview of Section 529 covers its pre- and post-P.L. 107-16 provisions.

What Is a QTP?

[9] States, their agencies or instrumentalities can establish and maintain tax-exempt programs

     (1) that permit individuals to purchase tuition credits or

[11] The other type of QTP is commonly known as a college savings plan. Generally, the beneficiary can use funds in this newer option toward the full range of QHEEs at any eligible institution regardless of which state sponsors the plan or where the contributor resides. In part for these reasons, college savings programs have become more popular than prepaid tuition plans with about 46 states offering them.⁸ It also has been suggested that state officials regard college savings plans as a way to offer people a benefit with little cost to the state. In contrast, if a state guarantees its prepaid tuition plan, it assumes the risk that earnings on the plan's pooled contributions will not match tuition inflation, in which case, the state must use other resources to satisfy the plan's obligations.⁹ From the contributors' perspective, some of the popularity of college savings plans may result from the possibility of greater returns than produced by the usually conservative investment strategy of prepaid tuition programs. Mutual fund companies typically manage college savings plans for states, and each state's plan generally offers more than one investment option (e.g., a portfolio of stocks and bonds whose percent composition changes automatically as the beneficiary ages, a portfolio with fixed shares of stocks and bonds, or with a guaranteed minimum rate of return). As the value of each savings account is based on the performance of the particular investment strategy chosen by the contributor, however, college savings plans could prove more risky than prepaid tuition plans. Indeed, the depressed value of some college savings accounts in 2001 -- a likely reflection of losses in the stock market -- could partly explain the greater number of families who established prepaid tuition plans in the first half of 2001 compared to all of 2000.¹⁰ (See Appendix Table 2 for a summary of some college savings programs by state.)

[12] The two types of QTPs have some common elements. A contributor may establish multiple accounts for the same beneficiary in different states, but the contributor cannot participate in a state-sponsored QTP if he/she sets up a prepaid tuition program with an eligible private institution (see following paragraph). A student or potential student also may be a designated beneficiary of multiple accounts (e.g., one originated by a parent and another by a grandparent). In addition, states may establish restrictions that are not mandated either by Section 529 of the Code or the proposed regulations issued in 1998. There generally are no income caps on contributors, unlike the limits that apply to taxpayers who want to claim the higher education tax deduction or Hope Scholarship and Lifetime Learning tax credits, or who want to use education individual retirement accounts (now called Coverdell education savings accounts). The absence of an income limit on contributors likely makes Section 529 plans particularly attractive to higher income families, who also are likely to make above-average use of the savings plans because persons with more income have a greater propensity to save.

[13] Effective for tax years beginning after December 31, 2001 and before January 1, 2011, P.L. 107-16 declared that one or more eligible higher education institutions -- including private institutions -- may establish and maintain prepaid tuition programs accorded the same federal tax treatment as state-sponsored prepaid tuition plans. At this point in time, states remain the sole tax-exempt sponsors of college savings plans,

[14] More than 200 private colleges have said they will initiate a national prepaid tuition program. Members of the Tuition Plan Consortium reportedly range from Ivy League schools to large private institutions to small liberal arts colleges. Contributors will be able to buy "tuition shares" for use at any member school regardless of its location.¹¹ Some believe the expansion of Section 529 plans to include private institutions might help the schools recruit students who would otherwise have been deterred from attending due to their comparatively high tuition. It also has been suggested that the plans of private institutions might appeal to alumni who could "boast they've not only enrolled their [offspring] in their alma mater at birth, [but] they've already paid the tuition."¹²

Tax Treatment of QTP Contributions and Earnings

[15] There is no federal income tax deduction for contributions to QTPs. As of early 2001, about 17 states allow residents who participate in their own state's plan to claim a partial or total state income tax deduction on contributions.¹³

[16] Earnings on contributions to Section 529 plans accumulate tax-deferred until withdrawn. The deferral confers greater benefits on families with relatively high incomes because of their higher marginal tax rates. Simulations that compared potential after-tax accumulations in a college savings plan to those in mutual funds employing the same asset allocation strategies generally found that the higher a household's tax bracket, the greater the advantage of saving through a Section 529 plan.¹⁴ The study concluded that other factors substantially affect the level of accumulations as well. These factors are the investment expenses that alternative savings vehicles charge and the value of a state income tax deduction, if any, on contributions to a QTP.

[17] Qualified Earnings Distributions. Earnings withdrawn from Section 529 plans to pay QHEEs are free from federal income tax effective in tax years starting after December 31, 2001 for state- sponsored programs, and starting after December 31, 2003 for programs of private institutions. Until then, QTP beneficiaries continue to pay federal income tax based on annuity taxation rules (Section 72 of the Code) for distributions of qualified earnings; the practice confers a considerable tax benefit on families in which the student's tax bracket (typically 15%) is much lower than the parents' tax bracket. The federal tax-exempt status of earnings withdrawals makes Section 529 plans an even more attractive means of saving for higher education expenses: for example, a student would pay nothing instead of incurring an $18,000 federal tax bill on $120,000 in earnings from contributions of $80,000 to a QTP made since the child was 8 years old.¹⁵ The tax-exemption might especially benefit older students who have relatively high incomes (e.g., a beneficiary employed full-time, or with a spouse employed full-time, who is pursuing an advanced degree or who is taking courses to update the skills used in his/her current occupation or to learn new skills in order to change occupations).

[18] As of early 2001, about 26 states provided residents a tax break on earnings distributions from their state's Section 529 plans used to pay an in-state eligible institution's QHEEs. Some have speculated that the new federal tax exemption could spur additional states to do the same for their residents. Only a few states extend the tax exemption on qualified earnings to residents that invest in other states' QTPs.¹⁶

[19] Non-Qualified Earnings Distributions. Plans must impose a "more than de minimis penalty" on the earnings portion of distributions that exceed or are not used for QHEEs (e.g., the beneficiary does not attend college). Effective for tax years beginning after December 31, 2003, withdrawals of excess earnings continue to be taxable income to the distributee (e.g., account owner) and subject to an additional tax of 10%, absent certain circumstances.¹⁷ The 10% tax penalty is the same as that which applies to Coverdell education savings accounts.

[20] After the additional 10% tax penalty goes into effect, plans still may collect for themselves the penalty that prior federal law required. However, some observers have commented that the modest revenue the penalties have afforded states is outweighed by their administrative burden. In addition, the practice would create a competitive disadvantage unless all states continued it.

Investment Control and the Tax Consequences of Transferring Funds Between Section 529 Plans

[21] Neither account owners nor beneficiaries have been allowed to direct the investment of contributions to, or associated earnings from, a Section 529 plan. According to the proposed regulations published on August 24, 1998 in the Federal Register (63 F.R. 45019), contributors are permitted -- at the time they establish an account -- to choose between a prepaid tuition and a college savings program, and if they select the latter, to choose among its investment options. The restriction on investment control had been considered a major drawback of QTPs, but it recently was significantly loosened.

[22] On September 7, 2001 (Cumulative Bulletin Notice 2001-55), the Internal Revenue Service issued a special rule that provides considerably more control to owners of college savings accounts. Effective immediately, a college savings program can permit current contributors to move balances -- without incurring taxes and without changing beneficiaries -- from one investment strategy to another within the state's offerings (e.g., into a less aggressive portfolio if market circumstances have significantly worsened over time) once per calendar year. Account owners also can, on a tax-free basis, move balances among a state's investment offerings if they change beneficiaries (e.g., into a more aggressive portfolio if the new beneficiary's matriculation date is later than the original beneficiary's).

[23] Changing Beneficiaries.Section 529 of the Code allows QTP distributions to occur without tax consequences if the funds are transferred to the account of a new beneficiary who is a family member of the old beneficiary. In order to receive this tax treatment, the new beneficiary must be one of the following family members:

     (1) the spouse of the designated beneficiary;

[24] Same-Beneficiary Rollovers. P.L. 107-16 permits tax- free transfers from one QTP to another for the same beneficiary once in any 12-month period effective in tax years starting after December 31, 2001. The report accompanying the legislation provided examples of the amendment's intended purpose: the same-beneficiary rollover permits contributors to make tax-free transfers between a prepaid tuition plan and a college savings plan offered by the same state, and between a state and a private prepaid tuition plan.

[25] Perhaps more importantly according to some observers, the amendment provides an account owner with the opportunity for greater control over the investment of his/her funds without changing beneficiaries. An account owner could, for example, make a same- beneficiary rollover into the program of another state with an investment strategy the contributor prefers to those offered by the original state's program. ¹⁹

Coordination of Contributions with Estate, Gift, and Generation-Skipping Transfer Taxes

[26] Contributors to Section 529 plans -- rather than beneficiaries -- maintain control over the accounts. In other words, contributors can change the beneficiary or have the plan balance refunded to them. This feature has been touted as a significant advantage of saving for college through a QTP as opposed to a custodial account opened under the Uniform Gifts to Minors Act (UGMA), for example. The custodial account actually is owned by the child who, upon gaining control of the funds, can use them for whatever purpose they chose.²⁰

[27] Nonetheless, the Taxpayer Relief Act of 1997 (P.L. 105-34) declared that payments to Section 529 plans made after August 1997 are completed gifts of present interest from the contributor to the beneficiary. As a result, an individual can contribute up to $10,000 annually (subject to indexation) as a tax-free gift per QTP beneficiary.

[28] A special gifting provision for contributions to Section 529 plans could make them of interest to individuals with substantial resources and to families with children who will be attending college in the not-too-distant future. QTP contributors may make an excludable gift of up to $50,000 in a single year by treating the payment as if it were made over 5 years. Thus, for example, each grandparent could contribute $50,000 (for a total of $100,000) to each grandchild's QTP in tax year 1999, which potentially would allow more earnings to accumulate than if each had contributed $10,000 annually from 1999 to 2003. In this instance, the two grandparents could not make another excludable gift to those account beneficiaries until 2004.

[29] By making QTP contributions completed gifts, the Taxpayer Relief Act also generally removed the value of the payments from the contributor's taxable estate. An exception occurs, however, if a contributor who selected the 5-year advance exclusion option dies within the period.

Interaction with Other Higher Education Tax Incentives

[30] P.L. 107-16 permits contributions to a QTP and to a Coverdell education savings account in the same year for the same beneficiary, effective for tax years starting after December 3l, 2001. ²¹ For the 2001 tax year, then, same-year contributions to a QTP and Coverdell account on behalf of the same beneficiary in the same year it will be considered an excess payment to the latter, and therefore, subject to income tax and a penalty.

[31] P.L. 107-16 also allows Hope Scholarship and Lifetime Learning credits to be claimed in the same year that tax-free distributions are made from a Section 529 plan or a Coverdell account, provided that the distributions are not used toward the same QHEEs for which the credits are claimed. If distributions are taken from a Section 529 plan and a Coverdell account on behalf of the same student, the Act further requires that QHEEs remaining after reduction for the education tax credits must be allocated between the two savings vehicles. These provisions are effective for tax years beginning after December 3l, 2001. With drawals from QTPs before that date still can be used to pay for the same expenses for which Hope Scholarship or Lifetime Learning credits are claimed, but also under prior law, those withdrawals are taxable to the beneficiary.

[32] P.L. 107-16 initiated an above-the-line income tax deduction for QHEEs, effective in tax years starting after December 31, 2001 and ending before January 1, 2006. The deduction cannot be taken for qualified expenses paid with tax-free withdrawals from a Section 529 program, Coverdell account, or certain U.S. savings bonds.

The Relationship Between QTPs andStudent Financial Aid

[33] Saving for college, through a Section 529 plan or other vehicle, may adversely affect eligibility for and the amount of need- based student financial aid. The degree to which this occurs depends on the type of QTP and on a family's financial resources.

[34] The "federal need analysis system" defines a student's financial need for federal student aid programs (other than Pell Grants) to be the gap between a school's cost of attendance (COA) and the student's expected family contribution (EFC) plus other estimated financial assistance. ²² A statutory formula determines the EFC based on data submitted by students to the U.S. Department of Education on the Free Application for Federal Student Aid (FAFSA).

[35] As prescribed by Section 480(j) of the Higher Education Act (as revised by the Higher Education Amendments of 1992), the Department's formula treats qualified distributions from prepaid tuition plans (both contributions and earnings) as reducing the student's COA on a dollar-for-dollar basis. The sharp reduction in the student's COA -- and therefore in financial need -- occurs regardless of who is the account owner (e.g., a parent, aunt or non- relative).

[36] The Department has more latitude regarding the treatment of college savings plans in financial need analysis. It decided that, because the account owner can change the beneficiary or close the account at will, this type of Section 529 plan is an asset of the parent. As the Department's formula counts a maximum of 5.6% of the account's value toward the EFC, the treatment is much more favorable to the student than is the case with prepaid tuition plans.

[37] For beneficiaries of college savings plans established by someone other than their parents, the value of the accounts is not reported on the FAFSA, and thus, does not raise the EFC. The exclusion of these assets from financial need analysis may "make eligible for student aid those who by definition are more affluent than others because they have more money to invest."²³ In other words, students in lower income families may be doubly disadvantaged: their families could not afford to take much, if any, advantage of QTPs; they could receive less traditional financial aid because more affluent students have become eligible for some type of assistance.

[38] The Department's formula applies the same share (50%) of the student's taxable income toward the EFC whether he/she is the beneficiary of a prepaid tuition or college savings plan. According to Section 529 of the Code, earnings distributions for payment of QHEEs through December 31, 2001 are includable as taxable income of the beneficiary (regardless of who is the account owner). The earnings distribution thus may increase the student's EFC and could reduce his/her financial need.

[39] P.L. 107-16 makes qualified distributions of QTP earnings tax-free effective in tax years starting after December 31, 2001 for plans of public institutions and after December 31, 2003 for plans of private institutions. As students will cease having taxable income from QTPs as of those dates, the earnings distributions might no longer raise their EFC. However, the Department might, for example, require a student to include qualified withdrawals as non-taxable income reported on the FAFSA. In addition, some have speculated that as families' accumulate large balances in college savings accounts, the Department might reconsider counting them as parental assets.²⁴ If the accounts were instead to be deemed a child's asset, for example, a much larger share (35% versus 5.6%) would go toward the EFC, perhaps reducing the amount of federal financial aid for which the student is eligible.

[40] It should be kept in mind that some private postsecondary institutions use other methodologies to determine student eligibility for non-federal student aid. These alternatives to the Department's formula may treat either or both types of QTPs differently when calculating student need. Although some private postsecondary schools attempt "to avoid penalizing students for having such accounts, . . . many colleges are moving in the opposite direction, and making sure their aid formulas count" QTPs as resources available to students.²⁵ In addition, while a few states do not include balances in Section 529 plans when determining state financial aid for students, most do.²⁶

Closing Observations

[41] In the last several years, numerous tax-advantaged measures have been enacted to make it easier for individuals to pursue postsecondary education. Some of these benefits are intended to encourage taxpayers to save in advance of students attending institutions of higher education (e.g., QTPs, Coverdell education savings accounts, and EE savings bonds). Other tax incentives do not come into play until students have entered postsecondary school (e.g., the higher education tax deduction, Hope Scholarship credit and Lifetime Learning credit). The variety of higher education provisions in the Code could make it difficult for the typical family to determine the best tax benefit or combination of tax benefits to use. A factor that could further complicate the decision-making process is the interaction between the various tax incentives and eligibility for student financial aid.

[42] Whether to establish a QTP, and then of which type, could prove to be a difficult decision in and of itself. Families presumably would want to study the differences between each state's prepaid tuition plan, each private institution's or group of institutions' prepaid tuition plan, and each state's college savings plan.

[43] To some degree, the financial situation of a family could make it easier for some to say "yea" or "nay" to QTPs. There are some low-income families who cannot afford to put current earnings toward saving, for college or other purposes. Some other low-income families might be able to save for college, but by doing so, they could reduce the amount of financial aid for which their children could well qualify. Of course, these relatively low-income families would have to be aware of the potentially adverse effect on student aid of Section 529 plans generally, and of prepaid tuition plans particularly, in order to factor it into their decision-making process.

[44] The decision to save for higher education expenses through a QTP also could be less difficult for high-income families. First, because of their relatively high marginal tax rate, higher income families stand to gain more than lower income families from the tax- advantaged treatment of Section 529 plans. Second, the offspring of high-income families are less likely to be eligible for need-based student aid. As a result, these families are unlikely to be swayed by whether a QTP offsets financial need dollar-for-dollar as in the case of prepaid tuition programs, or to a much lesser extent as in the case of college savings accounts, when considering which type of plan to setup. In addition, the estate and gift tax treatment of Section 529 plans could make them useful as estate-planning tools for wealthy families.

[45] Middle-income taxpayers could well have the greatest problem figuring out whether Section 529 should be part of their college financing plan and which type of QTP to fund. If, for example, a family suffers a reversal of fortune brought about by extended unemployment, very high medical bills or some other unanticipated event (e.g., birth of twins) after having established a QTP, it is more likely that a middleincome compared to high-income family will need the plan's savings for current consumption. As previously noted, however, account owners must pay income tax and penalties on refunds from either type of QTP. In addition, prepaid tuition plans typically return relatively little if any earnings compared to college savings accounts. Thus, for some middle-income families, saving for college through a vehicle not dedicated to a single purpose might be a more prudent choice.

[46] The interaction of Section 529 plans with need-based student aid also is likely to pose more of a dilemma for middle-than high-income families. If middle-income parents want to save via a QTP and think their child will be eligible for some assistance, then a college savings account seemingly would be the superior option given its comparatively less adverse treatment in the Department of Education's financial need analysis. Indeed, some private colleges reportedly are not immediately starting up prepaid tuition programs because they do not feel comfortable recommending this type of Section 529 plan to a family "if there is any chance at all that they would be eligible for financial aid."²⁷ Alternatively, prepaid tuition programs generally are a lower risk investment than college savings accounts and as such, prepaid plans might be a more comfortable choice for middle- compared to high-income taxpayers.

² The College Board. Trends in College Pricing 2001.

³ Information on other tax benefits available to persons pursuing education beyond K-12 can be found in the following products: CRS Report RL31129, Higher Education Tax Credits and Deduction: An Overview of the Benefits and Their Relationship to Traditional Student Aid, by James Stedman and Adam Stoll; and CRS Report 97-915, Tax Benefits for Education in the Taxpayer Relief Act of 1997: New Legislative Developments; CRS Report 97-243, Employer Education Assistance: Overview of Tax Status in 2001; and CRS Report 89-570, Education Savings Bonds: Eligibility for Tax Exclusion, all by Bob Lyke.

⁴ Eligible institutions of higher education generally are those accredited public and private nonprofit postsecondary schools that offer a bachelor's, associate's, graduate or professional degree, or another recognized postsecondary credential as well as certain proprietary and vocational schools. The institutions also must be eligible to participate in student aid programs of the U.S. Department of Education.

⁵ QHEEs are tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible institution as well as room and board for students attending school at least halftime. Note: P.L. 107-16 further expanded the definition of qualified expenses to cover the cost of special needs services for special needs beneficiaries. The legislation also raised the potential level of room and board expenses for students who attend eligible institutions at least half-time, thus enabling QTPs to pay for more of this qualified expense. Both these expansions are effective in tax year beginning after December 31, 2001.

⁶ For both types of Section 529 plans, payments cannot be made in the form of securities or other property.

⁷ Bell, Julie Davis and Demaree K. Michelau. Making College Affordable. State Legislatures, October 1, 2001. (Hereafter cited as Bell and Michelau, Making College Affordable.)

⁸ Bell and Michelau, Making College Affordable.

⁹ Roth, Andrew P. Who Benefits from States' College- Savings Plans? Chronicle of Higher Education, January 1, 2001. (Hereafter cited as Roth, Who Benefits from States' CollegeSavings Plans?)

¹⁰ Dugas, Christine. Market Woes Boost Prepaid Plans. USA Today, November 6, 2001.

¹¹ Schmidt, Peter. Bush Tax Cut Gives New Clout to States' College-Savings Plans. The Chronicle of Higher Education, June 22, 2001. (Hereafter cited as Schmidt, Bush Tax Cut Gives New Clout to States' College-Savings Plans.)

¹² Wuorio, Jeff. Prepaying Tuition Offers Peace of Mind at a Price. Available at [http://moneycentral.msn.com/articles/family/college/1462.asp].

¹³ Cropper, Carol Marie, and Anne Tergesen. College Savings Plans Come of Age. Business Week, March 12, 2001. (Hereafter cited as Cropper and Tergesen, College Savings Plans Come of Age.)

¹⁴ Davenport, Keith R., with Douglas Fore, and Jennifer Ma. Miracle Growth? Investment Advisor, September 2001.

¹⁵ Hurley, Joseph F. Planning Strategies Under the Education Provisions of the New Tax Act. Journal of Financial Planning, September 2001.

¹⁶ Cropper and Tergesen, College Savings Plans Come of Age.

¹⁷ The conditions under which an account owner is not subject to a penalty on a refund of excess earnings are the beneficiary's death or disability, or the beneficiary's receipt of a scholarship, veterans educational assistance allowance or other nontaxable payment for educational purposes (excluding a gift or inheritance).

¹⁸ AuWerter, Stephanie. The 529 Basics. SmartMoney.com, June 8, 2001. Available at [http://www.smartmoney.com/consumer/index. cfm?Story -- 200106083).

¹⁹ See, for example, Davis, Kristin. Miracle Grow. Kiplinger's Personal Finance, September 2001, and [http://www.savingforcollege.com].

²⁰ About 32 states allow parents to fund QTPs with money from custodial accounts. "Custodial" 529 plans retain some features of UGMA accounts, and there are tax consequences to funding QTPs in this manner. For more information see: Wang, Penelope. Education: Yes, There's Still College. Money, December 2001. (Hereafter cited as Wang, Education: Yes, There's Still College.)

²¹ Same-year contributions to a QTP and a Coverdell account for the same beneficiary could have gift-tax consequences if the payment to the two savings vehicles exceeds $10,000 in 1 year or $50,000 if the 5-year option is chosen.

²² The COA includes such items as tuition and fees, room and board, books, supplies, and living expenses. The EFC is the sum that a family can be expected to devote to higher education expenses based on its financial situation.

²³ Roth, no Benefits from States' College-Savings Plans?

²⁴ Wang, Education: Yes, There's Still College.

²⁵ Schmidt, Bush Tax Cut Gives New Clout to States' College-Savings Plans.

²⁶ The Big News About College Savings. Mutual Funds, June 25, 2001.

²⁷ AuWerter, Stephanie. Prepaid Tuition Plans. SmartMoney.com, June 8, 2001. Available at [http://www.smartmoney.com/consumer/index.cfm?Story - 20010681]. Note: As previously discussed, private educational institutions recently were extended the right to sponsor prepaid tuition plans. In order to "level the playing field" in financial need analysis between prepaid tuition and college savings plans, they among others (e.g., the College Savings Plans Network which is an affiliate of the National Association of State Treasurers) might attempt to have Congress amend the Higher Education Act. For more information see: Thomas, Georgie A. A Better Way to Plan for College. State Government News, September 1, 2001.

 Appendix Table 1. Comparison of State-Sponsored Prepaid Tuition

Alabama (Prepaid Affordable College Tuition)

Date of operation and enrollment period

1990 (September)

Age restriction

Beneficiary 9th grade or younger

What is covered

4 years of undergraduate tuition and fees at state public institutions

Tuition discount?

As much as 30% for newborns

Value if used for private or out-of-state public institutions

Weighted average of in-state tuition and fees

Refund policy

Only contract payments refundable, less $150 cancellation fee

Comments

$75 to enroll, benefits must be used within 10 years after the projected college entrance date, earnings exempt from state tax, one price fits all

State and program name

Alaska (Advance College Tuition Payment Program)

Date of operation and enrollment period

1991 (anytime)

Age restriction

No

What is covered

Credits can be used on tuition, fees, books, supplies and equipment

Tuition discount?

No

Value if used for private or out-of-state public institutions

Principal + earnings (usually money market rate)

State and program name

Refund policy

Penalty is between 7.5% and 12.5% of account value

Comments

2-year waiting period,^a plan purchasers get full value of the earnings, benefits must be used within 15 years of the projected college entrance date, guaranteed tuition

State and program name

Colorado (Colorado Prepaid Tuition Fund)

Date of operation and enrollment period

1997 (fall)

Age restriction

No

What is covered

Units can be used towards tuition, fees, books, supplies and equipment

Tuition discount?

8% discount for an 18-year contract

Value if used for private or out-of-state public institutions

Average in-state tuition and fees

Refund policy

Binding contract, no refund before the end of the term

Comments

$50 to enroll, no residency required, 10% penalty on earnings for non-qualified withdrawals,^b earnings exempt from state tax

State and program name

Florida (Florida Prepaid College Program)

Date of operation and enrollment period

1988 (October-January)

Age restriction

11th grade or younger

What is covered

Up to 4 years of undergraduate tuition and fees at state public or private higher institutions

Tuition discount?

3% for newborns for a 4-year university plan

Value if used for private or out-of-state public institutions

The lesser of (1) in-state public tuition (2) principal + 5% annual compound interest

Refund policy

Only contributions refunded, $50 less fee for contracts less than 2 years

Comments

$42 to enroll, benefits must be used within 10 years of the projected college entrance date, guaranteed

State and program name

Illinois (College Illinois!)

Date of operation and enrollment period

October 1998 (October-January)

Age restriction

No

What is covered

Up to nine semesters of tuition and fees at state public higher institutions

Tuition discount?

15% for newborns for a public university plan

Value if used for private or out-of-state public institutions

Average mean-weighted in-state public tuition and fees

Refund policy

Contributions + 2% interest refundable after 3 years, $100 fee

Comments

$75 to enroll, earnings exempt from state tax, 3-year waiting period, benefits need to be used within 10 years of projected college entrance date, guaranteed

State and program name

Maryland (Maryland Prepaid College Trust)

Date of operation and enrollment period

April 1998 (November 10-February 29)

Age restriction

10th grade or younger

What is covered

Up to 5 years of tuition and fees at state public institutions

Tuition discount?

8% for newborns for a 4-year university contract

Value if used for private or out-of-state public institutions

Up to the average in-state public tuition and fees

Refund policy

Refundable after 3 years, refund is the lesser of (1) payments plus 50% average earnings (2) lowest in-state public tuition and fees

Comments

$75 to enroll, up to $2,500 state tax deductible per year, qualified withdrawals exempt from state tax, benefits must be used within 5 years of projected college entrance date

State and program name

Massachusetts (U. Plan)

Date of operation and enrollment period

1995 (April-May)

Age restriction

10th grade or younger

What is covered

Certificates worth up to 4 years of tuition and fees at the highest cost institution among 83 participating institutions

Tuition discount?

No

Value if used for private or out-of-state public institutions

Principal + annual compound interest equal to consumer price index

Refund policy

Certificates only redeemable upon maturity (between 5 and 16 years)

Comments

Tuition certificates exempt from state tax, no residency required, not a qualified 529 plan, certificates must be redeemed within 6 years of maturity

State and program name

Michigan (Michigan Education Trust)

Date of operation and enrollment period

1988 (December-January)

Age restriction

8th grade or younger for full benefit contract, 10th grade or younger for limited benefit contract

What is covered

1 to 4 years of tuition and fees in (1) any state public institution for full benefit plan or (2) institution whose tuition is not more than 105% of the weighted average tuition of all state public 4-year universities

Tuition discount?

No

Value if used for private or out-of-state public institutions

Full contract: average 4-year public tuition and fees. Limited contract: lowest tuition of state public 4-year institutions

Refund policy

$200 fee, refund value for full benefit contract is the average tuition of state public 4-year institutions; for limited contract, it's the lowest tuition of state public 4-year institutions

Comments

$60 enrollment fee, $25 application fee, contributions state tax deductible, benefits must be used within 9 years of projected college entrance

State and program name

Mississippi (Prepaid Affordable College Tuition)

Date of operation and enrollment period

1997 (September-November, newborns anytime)

Age restriction

18 years or younger

What is covered

Up to 4 years of undergraduate tuition and fees at state public institutions

Tuition discount?

13% for newborns for a 4-year university plan

Value if used for private or out-of-state public institutions

Up to the average in-state tuition and fees

Refund policy

Up to $150 fee, refund includes contributions and interest earnings

Comments

$60 to enroll, contributions state tax deductible, earnings exempt from state tax

State and program name

Nevada (Prepaid College Tuition Plan Trust Fund)

Date of operation and enrollment period

October 1998 (October-November, newborns anytime)

Age restriction

9th grade or younger

What is covered

Up to 4 years of tuition at state institutions

Tuition discount?

Over 20% for newborns

Tuition discount?

No

Value if used for private or out-of-state public institutions

Weighted average tuition and fees at in-state public institutions

Refund policy

Contributions refunded, less administrative fees and up to $150 cancellation fee

Comments

$60 to enroll, benefits must be used within 10 years of projected college entrance date or the age of 30

State and program name

Ohio (Ohio Prepaid Tuition Program)

Date of operation and enrollment period

1989 (October-February, newborns anytime)

Age restriction

No

What is covered

Up to 2000 units can be purchased with each unit worth 1% of the weighted average tuition in state public universities

Tuition discount?

No

Value if used for private or out-of-state public institutions

Full value of the units

Refund policy

No refund for beneficiary under 18, refund equals 99% of the current unit value

Comments

$10-$50 to enroll, earnings exempt from state tax, in-state tuition guaranteed

State and program name

Pennsylvania (Tuition Account Program)

Date of operation and enrollment period

1993 (anytime)

Age restriction

No

What is covered

Tuition credits for the chosen public institution

Value if used for private or out-of-state public institutions

The lesser of: (1) account value; and (2) actual tuition cost

Refund policy

The lesser of: (1) contributions; and (2) 90% of account value

Comments

1-year waiting period, must be used within 10 years of projected college entrance date, earnings exempt from state and local taxes

State and program name

South Carolina (SC Tuition Prepayment Program)

Date of operation and enrollment period

September 1998 (September-December)

Age restriction

10th grade or younger

What is covered

2-year or 4-year tuition and fees at state public institutions

Tuition discount?

13% for newborns for a 4-year university plan

Value if used for private or out-of-state public institutions

No more than principal + program's rate of return

Refund policy

Contributions less $75 penalty

Comments

$65 to enroll, earnings exempt from state tax, benefits must be used before age 30

State and program name

Tennessee (Tennessee BEST)

Date of operation and enrollment period

1997 (fall)

Age restriction

No

What is covered

Up to 1500 units, each worth 1% of weighted average tuition and fees at state public institutions

Tuition discount?

No

Value if used for private or out-of-state public institutions

Weighted average in-state tuition and fees

Refund policy

Contributions + 50% earnings refunded, no refund before beneficiary is college age

Comments

$50 to enroll, 2-year waiting period, may be used for graduate school, earnings exempt from state tax

State and program name

Texas(Texas Tomorrow Fund)

Date of operation and enrollment period

1996 (October-February)

Age restriction

11th grade or younger

What is covered

Plans are offered for both public and private colleges

Tuition discount?

7% for newborns for a 4-year university plan

Value if used for private or out-of-state public institutions

Average tuition and fees at in-state public or private institutions, depending on the plan purchased

Refund policy

Contributions refunded, less fees. If beneficiary is under 18, interest up to 5% is also refunded

Comments

$85 to enroll, Contributions up to $2,000/year state tax deductible, may be used for graduate school, qualified withdrawals state tax exempt, must be used within 10 years after high school, one price fits all, guaranteed

State and program name

Virginia (Prepaid Education Program)

Date of operation and enrollment period

1996 (October 1-February 1)

Age restriction

9th grade or younger

What is covered

Up to 3 years of tuition and fees at community colleges and up to 5 years at universities

Tuition discount?

13% for newborns for a 4-year university plan

Value if used for private or out-of-state public institutions

Contributions and actual earnings up to the highest(average) in-state public tuition and fees for in-state private and out-of-state institutions

Refund policy

Within 3 years, only contributions refunded, less $100 penalty. After that, refund includes contributions plus (rate of return -2%) Earnings

Comments

$50 to enroll, must be used within 10 years of projected college entrance date, public tuition guaranteed

State and program name

West Virginia (WV Prepaid College Plan)

Date of operation and enrollment period

October 1998 (October-December)

Age restriction

9th grade or younger

What is covered

Up to 5 years of tuition and fees at state institutions

Tuition discount?

Nearly 20% for newborns for a 4-year university plan

Value if used for private or out-of-state public institutions

Weighted average tuition and fees at in-state public institutions Wyoming

Refund policy

$150 fee, contributions refunded. If 4 years or more after the projected entrance date, refund amount is the value of current tuition

Comments

$70 to enroll, contributions state tax deductible, not to be used for graduate school, must be used within 10 years of projected college entrance date or age 30

State and program name

Wyoming (Advanced Payment for Higher Education)

Date of operation and enrollment period

1987-1995

Age restriction

---

What is covered

---

Tuition discount?

---

Value if used for private or out-of-state public institutions

---

Refund policy

---

Comments

Program suspended in 1995 due to low enrollment

Source: Reprinted from [http://www.tiaa- crefinstitute.org/Data/statistics/pdfs/jma-prepaid.pdf], which relied on information contained in the web site [http://www.collegesavings.org], various states' web sites, the May 2001 issue of Money Magazine, and the book The Best Way to Save for College, by Joseph Hurley.

Note: In addition, several states (Iowa, Utah, Kentucky) have endowment funds the earnings of which will be provided to accounts for qualified higher education expenses.

^b Currently, earnings of qualified withdrawals are subject to federal income tax at the beneficiary's rate. Starting January 1, 2002, earnings of qualified withdrawals will be exempt from federal income tax. According to the current law, nonqualified withdrawals are subject to a penalty no less than 10% of the earnings portion of the withdrawal. Unless noted, a 10% penalty on earnings is imposed on non-qualified withdrawals. Any penalty is paid into the program. Starting January 1, 2002, the penalty on non-qualified withdrawals will be replaced by an additional 10% tax on the earnings portion.

Alaska

Name of the program

University of Alaska College Savings Plan

First date of operation

1991, revised May 2001

Investment options

Option 1 (enrollment-based): Eight portfolios shift away from equities and towards fixed income and cash over time. Investors may choose any age-banded portfolio.

Option 2 (static portfolios): 100% equities; 100% fixed-income; or 60% equities + 40% bonds.

Option 3 (advanced college tuition portfolio): prepaid plan for University of Alaska.

Current lifetime account balance limit

$250,000

Annual expense charges and other fees

$30 + 1.05%

State tax advantages

State has no income tax

Comments

No expense charges for Option 3. $30 annual fee waived for accounts with automatic payments or a combined balance of at least $25,000 for the same beneficiary.

State

Arizona

Name of the program

Arizona Family College Savings Program

First date of operation

June 1999

Investment options

Option 1: CollegeSure CDs with at least 4% return and FDIC insured up to $100,000.

Option 2: 100% equities.

Option 3: 75% equities + 25% fixed income.

Option 4: 100% fixed income.

Current lifetime account balance limit

$168,000

Annual expense charges and other fees

No fee for Option 1. For others, $10 to enroll, 1.42% annual fee

State tax advantages

Earnings state income tax exempt

Comments

Maturity of CollegeSure CDs ranges from 1 to 25 years. CDs must be withdrawn within 30 years.

State

Arkansas

Name of the program

GIFT College Investing Plan

First date of operation

December 1999

Investment options

Option 1(age-tailored): 90% equities+10% bonds for youngest, 10% equities + 25% bonds + 65% money market for 19 and older.

Option 2 (risk-adjusted): investors choose among four portfolios.

Current lifetime account balance limit

$175,000

Annual expense charges and other fees

$25 + 1.8%

State tax advantages

Earnings state income tax exempt

Comments

$25 annual fee waived for state residents and accounts with a balance of at least $25,000.

State

California

Name of the program

Golden State Scholar-Share Trust

First date of operation

October 1999

Investment options

Option 1 (age-based): 80% equities + 20% bonds for youngest, 15% equities + 35% bonds + 50% money market for 17 and older.

Option 2: 100% equities.

Option 3: 100% Social Choice equities. Option 4: guaranteed with at least 3% return.

Current lifetime account balance limit

$165,886

Annual expense charges and other fees

0.80%

State tax advantages

No

Comments

1-year waiting period^a. Benefits must be paid out 10 years after a beneficiary turns 35. If a beneficiary is over 35 when designated, then payments within 10 years.

State

Colorado

Name of the program

Scholars Choice

First date of operation

October 1999

Investment options

Option 1 (age-based): 80% equities + 20% bonds for youngest, 10% equities+ 60% bonds + 30% money market for 19 and older.

Option 2 (years-to-enrollment-based): 60% equities + 40% bonds if more than 10 years from enrollment, 10% equities + 60% bonds + 30% money market if less than 1 year from enrollment.

Option 3 (balanced): 50% equities + 50% bonds.

Option 4: 100% equities.

Option 5: 100% fixed income.

Current lifetime account balance limit

$150,000 (contribution limit)

Annual expense charges and other fees

$30 + 1.29%

State tax advantages

All contributions state tax deductible. Earnings state income tax exempt.

Comments

$30 annual fee waived for state residents. Option 2 targeted at adult beneficiaries.

State

Connecticut

Name of the program

Connecticut Higher Education Trust

First date of operation

December 1997

Investment options

Option 1 (aged-based): 80% equities + 20% bonds for youngest, 20% equities + 30% bonds + 50% money market for 17 and older.

Option 2 (high equity): 80% equities + 20% fixed income.

Option 3 (principal plus interest): guaranteed with at least 3% return.

Current lifetime account balance limit

$235,000

Annual expense charges and other fees

0.79%

State tax advantages

Earnings state income tax exempt

Comments

---

State

Delaware

Name of the program

Delaware College Investment Plan

First date of operation

July 1998

Investment options

Option 1 (age-based): portfolios shift away from equities and towards fixed income and cash over time. Investors may choose any age-banded portfolio.

Option 2: 100% equities.

Option 3: 70% equities + 30% bonds.

Option 4: 20% equities + 40% bonds + 40% money market.

Current lifetime account balance limit

$131,480

Annual expense charges and other fees

$30 + 1.0%

State tax advantages

No

Comments

$30 annual fee waived for accounts with automatic payments or a balance of at least $25,000.

State

Idaho

Name of the program

Idaho College Savings Plan

First date of operation

2001

Investment options

Option 1 (age-based): 75% equities + 25% bonds for youngest, 10% equities + 40% bonds + 50% money market for 17 and older.

Option 2: 100% equities.

Option 3: guaranteed with at least 3% return.

Current lifetime account balance limit

$235,000

Annual expense charges and other fees

0.92%

State tax advantages

Up to $4,000 per taxpayer per year state tax deductible

Comments

---

State

Illinois

Name of the program

Bright Start College Savings Plan

First date of operation

March 2000

Investment options

Option 1 (age-based): 90% equities + 10% bonds for youngest, 10% equities + 60% bonds + 30% money market for 18 and older. Option

2: 100% fixed income.

Option 3: 100% equities.

Current lifetime account balance limit

$160,000

Annual expense charges and other fees

0.99%

State tax advantages

Earnings state income tax exempt

Comments

---

State

Indiana

Name of the program

Indiana Family College

First date of operation

1997

Investment options

Option 1 (age-based): up to 100% stocks for those under age 11, more conservative for older beneficiaries.

Option 2: investors choose among four mutual funds.

Current lifetime account balance limit

$114,548 (contribution limit)

Annual expense charges and other fees

$10 to enroll, $25 + 1.06% annual fee

State tax advantages

Earnings state income tax exempt.

Comments

Withdrawals must be made within 25 years of account opening.

State

Iowa

Name of the program

College Savings Iowa

First date of operation

September 1998

Investment options

Option 1 (age-based): 80% stocks + 20% bonds for youngest, 80% bonds + 20% stocks for age 16 and older.

Option 2: six portfolios with 100%, 80%, 60%, 40%, 20%, and 0% equities, respectively.

Current lifetime account balance limit

$140,221

Annual expense charges and other fees

0.79%

State tax advantages

Up to $2,112 per taxpayer per year state tax deductible. Earnings exempt from state tax.

Comments

Beneficiary under 18 when account opened. Account balance must be paid out within 30 days after a beneficiary turns 30.

State

Kansas

Name of the program

Learning Quest Education Savings

First date of operation

July 2000

Investment options

Three age-based investment tracks (aggressive, moderate, and conservative) available.

Current lifetime account balance limit

$127,000 (contribution limit)

Annual expense charges and other fees

$40 + 1.22%

State tax advantages

Up to $2000 per taxpayer per year state tax deductible.

Comments

$40 annual fee reduced to $10 for residents or accounts with a balance of at least $100,000.

State

Kentucky

Name of the program

Education Savings Plan Trust

First date of operation

1990

Investment options

Option 1 (age-based): 75% equities + 25% bonds for youngest, 15% equities + 35% bonds + 50% money market for 17 and older.

Option 2: 100% equities.

Option 3: guaranteed with at least 3% return.

Current lifetime account balance limit

$235,000

Annual expense charges and other fees

0.80%

State tax advantages

Earnings exempt from state tax.

Comments

Either the owner or beneficiary needs to have "Kentucky ties."

State

Louisiana

Name of the program

Louisiana START

First date of operation

July 1997

Investment options

Option 1 (growth option): 85% equities + 15% fixed income.

Option 2 (balanced option): 60% equities + 40% fixed income.

Current lifetime account balance limit

$281,543

Annual expense charges and other fees

No fee

State tax advantages

Up to $2,400 per return per year state tax deductible. Earnings state tax exempt.

Comments

Residency required, 12-month waiting period. Up to 14% matching grant available for accounts with at least $100 contributions during the year and family income less than $100K.

State

Maine

Name of the program

NextGen College Investing Plan

First date of operation

August 1999

Investment options

Option 1 (age-based): 90% equities+ 10% bonds for youngest, 5% equities + 15% fixed income + 80% money market for 21 and older.

Option 2: 100% equities.

Option 3: 75% equities + 25% fixed income.

Option 4: 100% fixed income.

Current lifetime account balance limit

$225,000

Annual expense charges and other fees

$50 + 1.85%

State tax advantages

Earnings state income tax exempt.

Comments

---

State

Massachusetts

Name of the program

U. Fund

First date of operation

March 1999

Investment options

Option 1 (age-based): portfolios shift away from equities and towards fixed income and cash over time. Investors may choose any age-banded portfolio.

Option 2: 100% equities.

Option 3: 70% equities + 30% bonds.

Option 4: 20% equities + 40% bonds + 40% money market.

Current lifetime account balance limit

$171,125

Annual expense charges and other fees

$30 + 1.00%

State tax advantages

No

Comments

$30 annual fee waived for accounts with automatic payments or a balance of at least $25,000.

State

Michigan

Name of the program

Michigan Education Savings Program

First date of operation

2000

Investment options

Option 1 (age-based): 75% equities + 25% bonds for youngest, 15% equities + 35% bonds + 50% money market for 17 and older.

Option 2: 100% equities.

Option 3: guaranteed with at least 3% return.

Current lifetime account balance limit

$125,000

Annual expense charges and other fees

0.65%

State tax advantages

Up to $5,000 per taxpayer per year state tax deductible. Earnings state tax exempt.

Comments

One-third matching grant (up to $200) available from the state for new accounts with a state resident beneficiary who is 6 or younger, and whose family income is less than $80,000.

State

Mississippi

Name of the program

Mississippi Affordable College Savings

First date of operation

Fall 2000

Investment options

Option 1 (age-based): 80% equities + 20% bonds for youngest, 20% equities + 30% bonds + 50% money market for 17 and older.

Option 2: 100% equities.

Option 3: 100% money market.

Current lifetime account balance limit

$235,000

Annual expense charges and other fees

0.92%

State tax advantages

Earnings state tax exempt. Up to $10,000 per taxpayer per year state tax deductible.

Comments

---

State

Missouri

Name of the program

MO$T (Missouri Saving for Tuition Program)

First date of operation

November 1999

Investment options

Option 1 (age-based): 75% equities + 25% bonds for youngest, 10% equities + 40% bonds + 50% money market for 17 and older.

Option 2: 100% equities.

Option 3: guaranteed with at least 3% return.

Current lifetime account balance limit

$235,000

Annual expense charges and other fees

0.65%

State tax advantages

Up to $8,000 per taxpayer per year state tax deductible. Earnings state tax exempt.

Comments

12-month waiting period.

State

Montana

Name of the program

Montana Family Education Savings Program

First date of operation

1998

Investment options

CollegeSure CDs issued by College Savings Banks with at least 4% return (maturity of CDs needs to coincide with the expected years of college attendance), FDIC insured up to $ 100,000 per account.

Current lifetime account balance limit

$168,000 (contribution limit)

Annual expense charges and other fees

None

State tax advantages

Up to $3,000 per taxpayer per year state tax deductible.

Comments

$100 fee if withdrawals are made within 3 years of account opening. CDs must be withdrawn within 30 years.

State

Nebraska

Name of the program

Nebraska College Savings Plan

First date of operation

January 2001

Investment options

Option 1: four age-based portfolios that shift away from stocks over time.

Option 2: six target portfolios with 100%, 80%, 60%, 40%, 20%, and 0% equities, respectively.

Current lifetime account balance limit

$165,000

Annual expense charges and other fees

$24 + 1.0%

State tax advantages

Up to $ 1,000 per tax return per year state tax deductible. Earnings state tax exempt.

Comments

---

State

New Hampshire

Name of the program

Unique College Investing Plan

First date of operation

July 1998

Investment options

Option 1 (age-based): portfolios shift away from equities and towards fixed income and cash over time. Investors may choose any age-banded portfolio.

Option 2: 100% equities.

Option 3: 70% equities + 30% bonds.

Option 4: 20% equities + 40% bonds + 40% money market.

Current lifetime account balance limit

$166,600

Annual expense charges and other fees

$30 + 1.00%

State tax advantages

No state income tax. Earnings exempt from state interest and dividends tax.

Comments

$30 annual fee waived for accounts with automatic payments or a balance of at least $25,000.

State

New Jersey

Name of the program

New Jersey's Better Educational Savings Trust

First date of operation

August 1998

Investment options

Option 1 (age-based): 80% equities for the youngest, 20% equities + 80% fixed income for 15 and older.

Option 2: 100% equities.

Option 3: 75% equities + 25% fixed income.

Option 4: 100% fixed income.

Current lifetime account balance limit

$150,000

Annual expense charges and other fees

$5 + 0.5%

State tax advantages

Earnings exempt from state tax.

Comments

Residency required. Between $500 and $1,500 scholarship for college in NJ available for accounts that have been open for more than 4 years and with more than $1,200 contributions.

State

New Mexico

Name of the program

Education Plan of New Mexico

First date of operation

October 2000

Investment options

Option 1 (age-based): five portfolios that shift away from equities and towards fixed income and cash over time. Investors may choose any age-banded portfolio.

Option 2: 100% equities.

Option 3: 100% bonds.

Option 4: 100% money market.

Current lifetime account balance limit

$160,539 (contribution limit)

Annual expense charges and other fees

$30 + 1.29%

State tax advantages

All contributions state tax deductible. Earnings exempt from state tax.

Comments

1-year waiting period. $30 annual fee waived for residents, accounts with automatic payments or a balance of at least $10,000.

State

New York

Name of the program

New York's College Savings Program

First date of operation

September 1998

Investment options

Option 1 (age-based managed allocation): 75% equities + 25% bonds for youngest, 15% equities + 40% bonds + 45% money market for 17 and older.

Option 2 (aggressive managed allocation): similar to Option 1, with more equities.

Option 3 (high equity): 75% to 100% equities.

Option 4 (guaranteed): guaranteed with at least 3% return.

Current lifetime account balance limit

$235,000

Annual expense charges and other fees

0.65%

State tax advantages

Up to $5,000 per taxpayer per year state tax deductible. Earnings exempt from state tax.

Comments

3-year waiting period.

State

North Carolina

Name of the program

College Vision Fund

First date of operation

June 1998

Investment options

Option 1 (age-based): 85% equities + 15% bonds for youngest, 15% equities + 25% bonds + 60% money market for 21 and older.

Option 2: 100% equities.

Option 3 (guaranteed): 100% fixed income.

Current lifetime account balance limit

$187,500 (contribution limit)

Annual expense charges and other fees

$75 to enroll, 0.5% annual fee

State tax advantages

Earnings state income tax exempt.

Comments

Residency required, beneficiary less than 11th grade when account opened. Benefits must be paid out before the beneficiary turns 30. A 15% penalty on earnings for non-qualified withdrawals. ^b

State

Ohio

Name of the program

Ohio College Advantage Savings Plan

First date of operation

Fall 2000

Investment options

Option 1 (age-based): 85% equities + 15% bonds for youngest, 15% equities + 25% bonds + 60% money market for 21 and older.

Option 2: 60% equities + 30% bonds + 10% cash.

Option 3: 85% equities + 15% bonds. Option 4: 100% equities.

Current lifetime account balance limit

$229,000

Annual expense charges and other fees

1.27%

State tax advantages

Up to $2,000 per tax return per year state tax deductible. Earnings state tax exempt.

Comments

Residency required.

State

Oklahoma

Name of the program

Oklahoma College Savings Plan

First date of operation

April 2000

Investment options

Option 1 (age-based): 80% equities + 20% bonds for youngest, 20% equities + 30% bonds + 50% money market for 17 and older.

Option 2: 100% equities.

Option 3: guaranteed with at least 3% return.

Current lifetime account balance limit

$235,000

Annual expense charges and other fees

0.83%

State tax advantages

No

Comments

1-year waiting period.

State

Oregon

Name of the program

Oregon College Savings Plan

First date of operation

January 2001

Investment options

Option 1 (age-based): 90% equities + 10% bonds for youngest, 10% equities + 40% bonds + 50% money market for 18 and older.

Option 2: 100% equities.

Option 3: 100% fixed income.

Current lifetime account balance limit

$150,000

Annual expense charges and other fees

2.44%

State tax advantages

Up to $2,000 per taxpayer per year state tax deductible.

Comments

Residency required.

State

Rhode Island

Name of the program

RI Higher Education Savings Trust

First date of operation

September 1998

Investment options

Option 1 (age-based): 100% equities for youngest, 25% equities + 40% bonds + 35% money market for 19 and older.

Option 2 (age-based): similar to Option 1, with more equities.

Option 3: 100% equities.

Option 4: 60% equities + 40% fixed income.

Option 5: 100% bonds.

Current lifetime account balance limit

$246,000

Annual expense charges and other fees

$25 + 1.25%

State tax advantages

No

Comments

$25 annual fee waived for state residents, accounts with automatic payments or a balance of at least $25,000.

State

Tennessee

Name of the program

Tennessee BEST Investment Savings Program

First date of operation

March 2000

Investment options

Age-based managed allocation: 70% equities + 30% bonds for youngest, 5% equities + 40% bonds + 55% money market for 17 and older.

Current lifetime account balance limit

$100,000 (contribution limit)

Annual expense charges and other fees

0.95%

State tax advantages

Earnings exempt from state interest and dividends tax.

Comments

---

State

Utah

Name of the program

Utah Educational Savings Plan Trust

First date of operation

1996

Investment options

Option 1: 100% money market.

Option 2 (age-based): 95% stocks + 5% bonds for age 3 and younger, 25% stocks + 50% bonds + 25% money market for 17 and older.

Option 3 (age-based): similar to Option 2, with more equities.

Option 4: 100% equities.

Current lifetime account balance limit

$160,000 (contribution limit)

Annual expense charges and other fees

No fee for Option 1. For other options, up to $25 + 0.31%

State tax advantages

Up to $1,365 per beneficiary per taxpayer per year state tax deductible. Earnings state tax exempt. Account must be opened before the beneficiary turns 19 for these state tax benefits.

Comments

100% penalty on earnings if non-qualified withdrawals are made within 2 years of account opening. Benefits need to begin to be paid out before the beneficiary turns 22 years and 4 months (27 upon request).

State

Vermont

Name of the program

Vermont Higher Education Savings Plan

First date of operation

December 1999

Investment options

Option 1 (interest income option): 100% fixed-income securities.

Option 2 (age-based): 70% equities + 30% bonds for youngest, 10% equities + 40% bonds + 50% money market for 17 and older.

Current lifetime account balance limit

$100,000 (contribution limit)

Annual expense charges and other fees

0.80% for Option 2. No fee for Option 1.

State tax advantages

Earnings exempt from state tax.

Comments

"Vermont connection" required, 1-year waiting period.

State

Virginia

Name of the program

Virginia Education Savings Trust

First date of operation

December 1999

Investment options

Option 1 (age-based portfolios): portfolios shift away from equities and towards fixed income and cash over time. Investors may choose any age-banded portfolio.

Option 2 (all-fixed-income portfolio): 100% fixed income.

Current lifetime account balance limit

$100,000 (contribution limit)

Annual expense charges and other fees

$85 to enroll. 1.0% annual fee

State tax advantages

Up to $2,000 per account per year state tax deductible. Unlimited state tax deduction for owners 70 and older. Earnings state tax exempt.

Comments

1-year waiting period. Benefits must be paid out within 10 years after the projected high school graduation date (or, for adults, 10 years after the account is opened).

State

Wisconsin

Name of the program

EDVEST Wisconsin College Savings Program

First date of operation

1997

Investment options

Option 1 (age-based): 90% equities + 10% bonds if more than 10 years from enrollment, 100% bonds if less than 3 years from enrollment. Investors may choose any age-banded portfolio.

Option 2: (1) 100% index equities, (2) 100% bonds.

Option 3: (1) 90% equities + 10% bonds, (2) 70% equities + 30% bonds, (3) 50% equities + 50% bonds.

Option 4 (tuition unit option): similar to prepaid plans, funds invested in bonds.

Current lifetime account balance limit

$246,000

Annual expense charges and other fees

No fee for tuition unit option. 1.25% annual fee for other options.

State tax advantages

Up to $3,000 per beneficiary per year state tax deductible. Earnings state tax exempt.

Comments

2 academic-year waiting period before tuition units can be redeemed.

State

Wyoming

Name of the program

Wyoming College Achievement Plan

First date of operation

May 2000

Investment options

Option 1 (age-tailored): 80% equities + 20% bonds for youngest, 5% equities + 18% bonds + 77% money market for 22 and older.

Option 2: 100% equities.

Option 3: 75% equities + 25% fixed income.

Option 4: 100% fixed-income.

Current lifetime account balance limit

$120,000 (contribution limit)

Annual expense charges and other fees

$50 + 1.57%

State tax advantages

No state income tax.

Comments

$50 annual fee waived for state residents.

Source: Reprinted from [http://www.tiaa- crefinstitute.org/Data/statistics/pdfs/jma_savings.plans.pdf], which relied on information contained in the web site [http://www.collegesavings.org], various states' web sites, the May 2001 issue of Money Magazine, and the book The Best Way to Save for College, by Joseph Hurley.

Note: In addition, several states (Iowa, Utah, Kentucky) have endowment funds the earnings of which will be provided to accounts for qualified higher education expenses.

^b Currently, earnings of qualified withdrawals are subject to federal income tax at the beneficiary's rate. Starting January 1, 2002, earnings of qualified withdrawals will be exempt from federal income tax. According to the current law, nonqualified withdrawals are subject to a penalty no less than 10% of the earnings portion of the withdrawal. Unless noted, a 10% penalty on earnings is imposed on non-qualified withdrawals. Any penalty is paid into the program. Starting January 1, 2002, the penalty on non-qualified withdrawals will be replaced by an additional 10% tax on the earnings portion.