CRS Updates Report on Qualified Tuition Programs
RL31214
- AuthorsLevine, Linda
- Institutional AuthorsCongressional Research Service
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-20955
- Tax Analysts Electronic Citation2006 TNT 196-15
CRS Report for Congress
Received through the CRS Web
Order Code RL31214
Updated September 25, 2006
Linda Levine
Specialist in Labor Economics
Domestic Social Policy Division
Saving for College Through
Qualified Tuition (Section 529) Programs
Summary
Congress has tried to make higher education more affordable by providing favorable tax treatment to savings accumulated in qualified tuition programs (QTPs), also known as Section 529 programs. QTPs initially allowed individuals to save for qualified higher education expenses (QHEEs) at eligible institutions on a tax-deferred basis. The benefit was enhanced temporarily upon enactment of P.L. 107-16 by, among other things, making qualified withdrawals from Section 529 programs tax-free. The temporary changes to Section 529 plans were made permanent as part of the Pension Protection Act of 2006 (P.L. 109-280).
One type of QTP, prepaid tuition plans, enables account owners to make payments on behalf of student beneficiaries for a specified number of academic periods/course units at current prices thereby providing a hedge against tuition inflation. Only states were permitted to sponsor prepaid plans until P.L. 107-16 extended sponsorship to eligible higher education (private) institutions effective in 2002.
States remain the sole sponsor of the more popular type of Section 529 program, college savings plans, which account for most of the $89.5 billion in QTP assets as of March 2006. College savings plans can be used toward a variety of QHEEs at any eligible institution regardless of which state sponsors the plan or where the beneficiary attends school. In contrast, if beneficiaries of state-sponsored prepaid plans attend out-of-state or private schools, the programs typically pay the same tuition that would have been paid to an eligible in-state public school. Also unlike prepaid plans, in which the state plan invests the pooled contributions with the intent of at least matching tuition inflation, college savings account owners can select from a range of investment portfolios. College savings plans thus offer the chance of greater returns than prepaid plans, but they also could prove more risky. Additionally, college savings plans charge fees (e.g., enrollment fees and underlying mutual fund fees) that lower returns -- more so for accounts opened through investment advisors (e.g., sales charges). The level of these fees vis-a-vis the tax savings, the extent and manner of disclosure across plans, and the role of federal regulators was the subject of oversight during the 108th Congress.
Both types of Section 529 programs have several features in common in addition to the above-mentioned federal tax treatment of qualified withdrawals. Account owners, rather than beneficiaries, maintain control over the funds. Contributions are not deductible on federal tax returns. A special gifting provision also allows a contributor to make five years worth of tax-free gifts in one year to a QTP beneficiary's account. Withdrawals used toward QHEEs must be coordinated with other higher education tax benefits. Assets in Section 529 plans may affect a student's eligibility for federal need-based financial aid. Earnings not applied toward QHEEs (e.g., the beneficiary forgoes college) generally are taxable and subject to a penalty. The tax and penalty can be avoided if account owners designate a new beneficiary who is a relative of the original beneficiary. This report will be updated as warranted.
Contents
What Is a Section 529 Program?
Prepaid Tuition Plans
State-Sponsored Plans
Plans of Eligible Institutions of Higher Education
College Savings Plans
Latest Issues by Type of Section 529 Program
College Savings Plans: Fees and Disclosure
Prepaid Tuition Plans: Closures and Modifications
Tax Treatment of QTP Contributions and Earnings
Qualified Earnings Distributions
A Penalty
Investment Control and the Tax Consequences
of Transferring Funds between Section 529 Plans
Changing Beneficiaries
Same-Beneficiary Rollovers
Coordination of Contributions with Estate, Gift,
and Generation-Skipping Transfer Taxes
Interaction with Other Higher Education Tax Incentives
The Relationship Between QTPs and Student Financial Aid
Closing Observations
List of Tables
Appendix Table 1. Comparison of State-Sponsored Prepaid Tuition Plans
Appendix Table 2. Comparison of State-Sponsored College Savings Plans
Qualified Tuition (Section 529) Programs
Since the late 1980s, an oft-voiced concern has been that the nation's educational and training institutions may not be supplying enough persons with the heightened skill levels reportedly demanded by businesses. Indeed, the demand for workers with at least some postsecondary education has been growing and is projected to continue growing at a more rapid rate than the demand for individuals with, at most, a high school degree.1
At the same time, the cost of higher education has risen to a greater extent than average household income over the past two decades.2 The trend has caused concern among Members of Congress that higher education is becoming less affordable for middle-income families.
In response to these trends, Congress has added a panoply of tax benefits to supplement the traditional student financial aid system with the intention of encouraging human capital development by increasing the affordability of postsecondary school attendance. Among the tax incentives to promote higher education is the qualified tuition program (QTP) or Section 529 program, named for its place in the Internal Revenue Code (IRC). It provides favorable tax treatment to money accumulated for future payment of qualified higher education expenses.
Although more states sponsored QTPs after the Small Business Job Protection Act of 1996 (P.L. 104-188) clarified their federal tax status, the amendment of Section 529 by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) greatly increased the program's attractiveness. Among other temporary amendments to QTPs, EGTRRA made withdrawals from Section 529 plans to pay qualified higher education expenses tax-free. (Previously, earnings on contributions to QTPs had been allowed to grow on a tax-deferred basis and their subsequent withdrawal to pay for qualified expenses had been taxable.) 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 IRC sunset for tax years beginning after December 31, 2010.3 The sunset provision introduced an element of uncertainty for individuals considering whether to contribute to QTPs on behalf of persons expected to attend postsecondary institutions in 2011 or thereafter until the 109th Congress passed the Pension Protection Act of 2006 (P.L. 109-250), which included provisions that made permanent EGTRRA's changes to Section 529 plans.
As EGTRRA's modifications to Section 529 plans are now permanent, this report provides an overview of QTPs that cover its post-P.L. 107-16 provisions. It also addresses issues of current concern associated with QTPs (e.g., fees of college savings accounts imposed by the state plan sponsors, mutual fund companies, and brokers/financial advisors). The report discusses the interaction of Section 529 plans with other tax incentives for postsecondary education and with the traditional federal need-based student aid system, as well. The Appendix Tables 1 and 2 summarize Section 529 prepaid tuition and college savings plans by state, respectively.
What Is a Section 529 Program?
States, their agencies, or their instrumentalities can establish and maintain tax-exempt programs
(1) that permit individuals to purchase tuition credits or certificates for use at eligible institutions of higher education4 on behalf of a designated beneficiary which entitles the beneficiary to the waiver or payment of qualified higher education expenses; or
(2) that permit individuals to contribute to an account for the purpose of paying a beneficiary's qualified higher education expenses (QHEEs).5
In addition to states, eligible institutions of higher education can now offer the first type of QTP, commonly called prepaid tuition plans. States remain the sole tax-exempt sponsors of college savings plans, which is the name commonly applied to the second type of QTP.
According to Section 529 of the IRC, payments to both types of QTPs must be in cash (e.g., not in the form of securities). A contributor may establish multiple accounts for the same beneficiary, and an individual may be a designated beneficiary of multiple accounts (e.g., an account in a college saving plan sponsored by state A and another in state B originated by a parent for child X or an account in a prepaid tuition plan sponsored by state C that is originated by a parent for child Y and an account in a college savings plan sponsored by state D that is originated by a grandparent of child Y). But states may establish restrictions that are not mandated either by Section 529 or by 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 Hope Scholarship and Lifetime Learning tax credits or who want to use Coverdell Education Savings Accounts.6 The absence of an income limit on contributors likely makes Section 529 programs 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.7
Prepaid Tuition Plans
A prepaid tuition plan enables a contributor (e.g., parent, grandparent, and interested non-relative) to make lump-sum or periodic payments for a specified number of academic periods or course units at current prices. Prepaid tuition programs thus provide a hedge against tuition inflation.
State-Sponsored Plans. Some 15 states currently sponsor the plans. As of March 2006, prepaid tuition plans held more than $14 billion in contributions and earnings.8
If the beneficiary of a state-sponsored prepaid tuition contract (e.g., child, grandchild or someone not related to the contributor) elects to attend an in-state private college or an out-of-state college, the program typically will pay the student's chosen institution the tuition it would have paid an in-state public college -- which may be less than the chosen institution's tuition. The specifics of prepaid tuition plans vary greatly from one state to another (e.g., as to a residency requirement, age limitation on beneficiaries, minimum and maximum contributions, refund policies, and state guarantee of rate of return and principal). Some plans reportedly have begun to cover room and board as well as tuition and related expenses.9 (See Appendix Table 1 for a summary of the specific elements of state-sponsored prepaid tuition programs, including how the different programs calculate the value of a contract if a beneficiary attends a private institution or an out-of-state public institution.)
Plans of Eligible Institutions of Higher Education. Effective for tax years beginning after December 31, 2001, 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. Some believe the expansion of the plans to include private institutions might help them recruit students who would otherwise have been deterred from attending due to comparatively high tuition charges. 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."10
In early 2003, the not-for-profit Tuition Plan Consortium received regulatory approval to sell "tuition certificates" in its Independent 529 Plan. It began accepting contributions later that year. More than 240 colleges and universities, ranging from research universities to small liberal arts colleges, have agreed to participate in the plan. A certificate prepays a share of a beneficiary's tuition, with the value of the share at a particular institution depending upon its tuition level (e.g., if, in the year a certificate in the amount of $10,000 would pay for one-half of the annual tuition and mandatory fees at College X or one-third of the annual tuition and fees at University Y, then the certificate will be worth that same fraction regardless of a school's tuition level at the time of enrollment). Beneficiaries do not commit to attending specific institutions at the time of pre-payment, and they may use the certificates at any participating school. Each year, participating institutions will set a discount from its current tuition and fees for purchasers of certificates, with the plan setting a minimum discount rate. A certificate cannot be used toward tuition and fees until three years from the date of purchase, and it generally will expire upon the 30th anniversary of its purchase. Unless at least $500 is contributed by the end of the first two years after having purchased a certificate, the plan will cancel the certificate and refund contributions without interest. The value of a certificate, adjusted for the plan's investment performance plus nominal amount of interest, cannot be refunded until one year from the date of purchase or upon the death of the designated beneficiary.11 Unlike either state-sponsored prepaid tuition plans or college savings plans, account owners of Independent 529 Plan tuition certificates do not pay administrative fees. They are absorbed by the participating educational institutions.12
College Savings Plans
State-sponsored college savings plans typically offer several predetermined investment options from which contributors can select (e.g., a portfolio of equities and bonds whose percent composition changes automatically as the beneficiary ages, a portfolio with fixed shares of equities and bonds, or with a guaranteed minimum rate of return). Unlike with prepaid tuition plans, the value of each savings account is based on the performance of the investment strategy chosen by the account owner.
A number of explanations have been offered for the proliferation and popularity of this newer type of QTP. It 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.13
Another reason put forth, this time from the contributors' perspective, is that the funds in a college savings plan can be used toward the full range of QHEEs at any eligible institution, regardless of which state sponsors the plan or where the contributor resides. In addition, some of the investment options of college savings plans offer account owners the possibility of greater returns than produced by the usually conservative investment strategy of prepaid tuition programs. Further, college savings plans have become increasingly popular as an employee benefit. Typically, the employer contracts with a mutual fund company and employees' voluntary contributions are deducted from their paychecks.14 A few credit card companies also rebate a percentage of purchases made by cardholders. Accumulated rebates periodically are transferred into particular college savings plans.15
In part for these reasons, all 50 states and the District of Columbia offer college savings programs. They accounted for more than $75 billion (84%) of the $89.5 billion held in 8.6 million QTP accounts as of March 2006.16 (See Appendix Table 2 for a summary of college savings plans by state.)
Latest Issues by Type of Section 529 Program
College Savings Plans: Fees and Disclosure. States generally have turned to financial services companies (e.g., the Vanguard Group, TIAA-CREF, Fidelity Investments, and Merrill Lynch) to manage their college savings plans. These firms charge account owners fees that are in addition to those states typically impose (e.g., enrollment fee, annual account maintenance fee, and administrative fee). The investment company fees, which reduce returns, generally are calculated as percentages of the assets in the basket of mutual funds that can comprise one investment option in a college savings plan.17 (Appendix Table 2 includes estimates of average annual expenses for direct-sold plans.) Reportedly, "expenses are higher in most 529 plans than in equivalent mutual funds . . . [e]ven among plans that aren't sold by brokers (and thus don't have high upfront loads or annual sales fees)."18
Perhaps in response to the plethora of college savings plans and to the multiplicity of each plan's investment choices, contributors appear to have increased their use of commissioned brokers and financial advisors.19 These intermediaries are the most frequently mentioned source of plan information among persons who have established college savings accounts.20 Additionally, as shown in Appendix Table 2, some plans require residents of other states to buy their plans through brokers or financial advisors. Almost two-thirds of college savings plans were sold by these intermediaries in 2003, with three-fourths of new accounts coming from this source.21 Individuals who purchase college savings plans through brokers and financial advisors incur sales charges of up to 5.75% of account assets in addition to the fees imposed by the state plans and fund companies.22
Congressional Oversight. Some Members of Congress became concerned about such things as the overall level of fees and the extent to which they offset the value of the tax benefit, the lack of uniform disclosure across plans that impedes savers from making informed decisions, and about what group(s) has regulatory authority. In its March 2004 response to a letter from House Committee on Financial Services Chairman Oxley, the Securities and Exchange Commission (SEC) explained that the plans generally are not regulated under federal securities laws because they are considered instrumentalities of their respective states.23 As a result, those who enroll in 529 savings plans are not required to be provided the same quality of information as other mutual fund investors. Similarly, the SEC stated that investors in the state-sponsored plans do not have to get the same periodic reporting as other mutual fund investors and that 529 investors encounter difficulty making comparisons across plans because of the lack of standardized disclosure (e.g., some plans report returns before fees are deducted while others report results after fees have been subtracted). The SEC went on to note, however, that the investment companies state-sponsored plans hire to manage assets or provide advice as well as the broker-dealers and municipal securities dealers that sell shares in the plans are governed by applicable federal securities laws (e.g., anti-fraud provisions) and rules of the Municipal Securities Rulemaking Board (MSRB) and the NASD (formerly known as the National Association of Securities Dealers).24 Then SEC Chairman Donaldson consequently created a Task Force on College Savings Plans in March 2004 to examine issues raised by the structure and sale of college savings plans.
On June 2, 2004, the House Committee on Financial Services' Subcommittee on Capital Markets, Insurance and Government Spending held a hearing on these matters. The complexity of the college savings plans' fee structure and the lack of standardized disclosure were frequently raised by those who testified. The Chair of the College Savings Plan Network (CSPN) testified that the group, which had begun to develop voluntary disclosure guidelines in 2003, approved the principles in 2004.25 (In June 2006, CSPN adopted a draft set of disclosure principles that amend and restate the previously adopted principles.)
The Senate Committee on Governmental Affairs' Subcommittee on Financial Management, the Budget, and International Security held oversight hearings on college savings on September 30, 2004. NASD Vice Chairman and President of Regulatory Policy and Oversight Mary Schapiro testified about the application of advertising rules to the marketing of investments that underlie college savings plans: broker-dealers have been made to correct sales material they are required to file with the self-regulatory, private-sector organization. She also addressed the fact that some states accord preferential tax treatment to residents' contributions to in-state college savings plans and that an MSRB rule states that broker-dealers must have reason to believe that the investments they recommend are suitable to the customer. A 2003 NASD investigation of the sales practices of six firms found, however, that most sold virtually all their 529 plan investments to customers who were not residents of the state sponsoring the plan.26 Upon expanding the investigation to additional firms in reported that the NASD issued an Investor Alert. She also noted the availability of information on its website intended to educate both broker-dealers and investors on college savings plans.27
At the same hearing, testimony was given by the MSRB Senior Associate General Counsel Ernesto Lanza. He discussed an MSRB draft amendment to its advertising rule proposed in June 2004, which is intended to improve the comparability of performance data across different state-sponsored 529 savings plans, mutual funds, and other types of investments. After the MSRB filed the proposed rule change with the SEC, the new requirements went into effect in December of 2005.28 The MSRB and NASD issued a statement in February 2006 in which they agreed to cooperatively strive to promote consistency across regulations and interpretations regarding 529 plans. In August 2006, the MSRB's interpretive guidance about customer protection obligations of brokers, dealers, and municipals securities dealers marketing college savings plans became effective (e.g., disclosure to clients of tax benefits offered by their home states' 529 plans).
The SEC similarly has continued to pursue its oversight of states that sponsor and firms that sell 529 savings plans. In August 2005, for example, the commission announced settlement of a cease-and-desist proceeding against the Utah Educational Savings Plan Trust which had made false statements and omissions about errors in its operation system and accounting practices. The SEC also filed a civil action against the Trust's former director for violating securities laws. In addition, the commission released a new Section 529 investor guide that explains the different plans, their disclosures, tax implications, and expenses.29 Subsequently (December 1, 2005), the SEC settled administrative and cease-and-desist proceedings against American Express Financial Advisors Inc. (now called Ameriprise Financial Services Inc.) for its failure to disclose receipt of revenue-sharing payments that resulted from distribution of certain shares of mutual funds and 529 college savings plans.
Prepaid Tuition Plans: Closures and Modifications. Due to the impact of the 2001 recession on state government support for higher education and of the coincident downturn in the stock market on plan performance, some state-sponsored prepaid plans made modifications or closed. As a result of unanticipatedly large increases in tuition,
Many [plans] are reporting "actuarial deficits" in the millions to tens of millions of dollars, meaning the plans' assets are currently less than future tuition obligations . . . There is a major difference between having an actuarial deficit and a cash-flow issue, [however] . . . New participants will continue to join the program[s], current account holders will continue adding to their accounts, and program investments will have time to rebound.30
In addition, current participants in state-sponsored plans that offer a tuition contract for which they paid in full or for which they agreed to make payments over time are unlikely to be affected by rising tuition prices.
Nonetheless, a number of states have taken preemptive measures. For example, Colorado's prepaid tuition plan is closed to new participants and contributions are not being accepted from existing participants who were told that future tuition increases might not be fully covered. Ohio also closed its plan to new participants. Other plans greatly increased the value of tuition units in the past few years.31
Tax Treatment of QTP Contributions and Earnings
There is no federal income tax deduction for contributions to QTPs. About 26 states and the District of Columbia allow residents who participate in their own state's plan to claim a partial or total state income tax deduction on contributions.32 Numerous financial services firms that manage Section 529 plans formed the College Savings Foundation in 2003 to, among other things, encourage all states to allow the deductibility of contributions of their residents to any state's plan.33
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.34 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. A subsequent analysis, which took into account reductions in capital gains and dividend tax rates, generally found that Section 529 plans remained a superior investment option.35
Qualified Earnings Distributions
Earnings withdrawn from Section 529 plans to pay QHEEs became 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. Before then, QTP beneficiaries continued to pay federal income tax based on annuity taxation rules (Section 72 of the Code) for distributions of qualified earnings; the practice conferred a considerable tax benefit on families in which the student's tax bracket (typically 15%) was 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 eight years old.36 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).
As shown in the Appendix tables, the majority of states now provide residents a tax break on qualified earnings distributions from Section 529 plans. The federal tax exemption likely spurred some of these states to begin to do so. Only a few states extend the tax exemption on qualified earnings to residents that invest in other states' QTPs.37
A Penalty
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, 2001, withdrawals of excess earnings continue to be taxable income to the distributee (e.g., account owner or beneficiary) and subject to an additional tax of 10%, absent certain circumstances.38 The 10% tax penalty is the same as that which applies to Coverdell education savings accounts.
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.
As clarified by the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147), the new tax penalty does not apply to earnings distributions that are included in income but used for QHEEs. For example, a withdrawal is made from a QTP in the amount of $2,000, which is equal to a student's QHEEs in a given year. Because a higher education tax credit of $500 is claimed, the coordination rule requires that the credit amount be subtracted from the QHEE total ($2,000 - $500 = $1,500). As a consequence, $500 of the QTP withdrawal becomes subject to taxation but not to the additional 10% tax penalty. (See the section below for more information on the interaction between Section 529 plans and other higher education tax incentives.)
Effective after December 31, 2002, the 10% tax penalty also no longer applies to withdrawals made when a beneficiary attends the U.S. Military Academy, the U.S. Naval Academy, the U.S. Air Force Academy, the U.S. Coast Guard Academy, or the U.S. Merchant Marine Academy. The amount of the withdrawals must be less than the costs of advanced education in order to avoid the penalty. This amendment is a part of the Military Family Tax Relief Act of 2003 (P.L. 108-121).
Investment Control and the Tax Consequences
of Transferring Funds between Section 529 Plans
Neither account owners nor beneficiaries are 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 a prepaid tuition plan, a college savings program, or both; if they select the a college savings program, they then can choose among its investment options.
The restriction on investment control had been considered a major drawback of QTPs, but it was significantly loosened. On September 7, 2001 (Cumulative Bulletin Notice 2001-55), the Internal Revenue Service issued a special rule that permits contributors to college savings programs 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).
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; (2) a son or daughter, or their descendants; (3) stepchildren; (4) a brother, sister, stepbrother, or stepsister; (5) a father or mother, or their ancestors; (6) a stepfather or stepmother; (7) a niece or nephew; (8) an aunt or uncle; (9) a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; (10) the spouse of an individual referenced in (2)-(9); or (11) any first cousin of the designated beneficiary.
First cousins are covered by the definition in tax years starting after December 31, 2001. The expansion to first cousins makes QTPs "more attractive to grandparents [who] can transfer an account between cousins [that is, between their grandchildren, and thereby avoid paying federal income tax and a penalty on non-qualified distributions] if, say, the original beneficiary decides not to go to college."39
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, 2001.40 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.
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.41
Coordination of Contributions with Estate, Gift,
and Generation-Skipping Transfer Taxes
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) or the Uniform Transfers for Minors Act (UTMA) or through a Coverdell education savings account. These savings vehicles ultimately are owned by the child. The child also can use them for whatever purpose they chose upon gaining control of the funds.42
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 $12,000 in tax year 2006 as a tax-free gift per QTP beneficiary. (This amount is subject to indexation.)
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. A QTP contributor may make an excludable gift of up to $60,000 in 2006, for example, by treating the payment as if it were made over five years. Thus, each grandparent could contribute $60,000 (for a total of $120,000) to each grandchild's QTP in tax year 2006, which potentially would allow more earnings to accumulate than if each had contributed $12,000 annually for five years. In this instance, assuming the tax-free gift annual limit remained at $12,000 over the period, the two grandparents could not make another excludable gift to those account beneficiaries until 2011.
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 five-year advance exclusion option dies within the period.
Interaction with Other
Higher Education Tax Incentives
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 31, 2001.43 Before then, same-year contributions to a QTP and Coverdell account on behalf of the same beneficiary were considered an excess payment to the latter, and therefore, subject to income tax and a penalty.
P.L. 107-16 also allows Hope Scholarship and Lifetime Learning credits to be claimed for tuition and fees 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 expenses 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.
P.L. 107-16 initiated an above-the-line income tax deduction for tuition and fees, effective in tax years starting after December 31, 2001 and ending before January 1, 2006. The deduction can be taken for qualified expenses paid with contributions portion of withdrawals from a Section 529 program.
The Relationship Between QTPs and
Student Financial Aid
Saving for college through a Section 529 plan may adversely affect eligibility for and the amount of need-based student financial aid. 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.44 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).
The Department decided that, because the account owner can change the beneficiary or close the account at will, college savings plans are an asset of the parent rather than of the student. The Department's formula counts a maximum of 5.64% of the account's value toward the EFC. For beneficiaries of college savings plans established by someone other than their parents (e.g., a grandparent), the value of the accounts is not reported on the FAFSA, and thus does not automatically 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."45
Until Congress passed the Deficit Reduction Act (S. 1932) in December 2005 and the President signed it in February 2006 (P.L. 109-171), the Department interpreted Section 480(j) of the Higher Education Act (as revised by the Higher Education Amendments of 1992) to mean that qualified distributions from prepaid tuition plans (both contributions and earnings) reduce the student's COA or are considered as estimated financial assistance. Either treatment cuts the student's financial need on a dollar-for-dollar basis. The sharp reduction occurred regardless of who is the account owner (e.g., a parent, aunt or non-relative). To level the playing field in financial need analysis between 529 prepaid tuition and college savings plans, P.L. 109-171 states that both are to be treated as parental assets. According to guidance recently issued by the department, it interpreted the act to mean that both types of 529 plans should be considered an asset of the parent if the parent is the account owner. Seemingly, then, assets held in 529 plans of which the student is the account owner would escape consideration from financial need analysis because the act also states that the plans should not be treated as an asset of a student.
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 IRC, earnings distributions for payment of QHEEs through December 31, 2001 were includable as taxable income of the beneficiary (regardless of who is the account owner) and therefore may have increased the student's EFC and could have reduced his/her financial need. P.L. 107-16 makes qualified distributions of QTP earnings tax-free effective in tax years starting after December 31, 2001 for state-sponsored plans and after December 31, 2003 for plans of eligible higher education institutions. As students no longer will have taxable income from QTPs as of those dates, the earnings distributions will not raise their EFC.46
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.47 Similarly, while most states include balances in Section 529 plans when determining state financial aid for students, a sizeable share (44%) exclude the value of QTPs.48
Closing Observations
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, while other tax incentives do not come into play until students have entered postsecondary school. The variety of higher education provisions in the IRC could make it difficult for the typical family to determine the best tax benefit or combination of 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.49
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.
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 in order to factor it into their decision-making process.
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. In addition, the estate and gift tax treatment of Section 529 plans could make them useful as estate-planning tools for wealthy families.
Middle-income taxpayers could well have the greatest problem figuring out whether Section 529 should be part of their college financing plan. They are likely to be less certain about their children's eligibility for federal need-based assistance than either low- or high-income families. In addition, if 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 middle-income 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.
FOOTNOTES
1 See, for example, CRS Report 97-764, The Skill (Education) Distribution of Jobs: How Is It Changing?, by Linda Levine.
2 For more information, see CRS Report RL32100, College Costs and Prices: Background and Issues for Reauthorization of the Higher Education Act, by Rebecca R. Skinner.
3 For additional information, see CRS Report RS21870, Education Tax Benefits: Are They Permanent or Temporary?, by Linda Levine.
4 Eligible institutions of higher education generally are those accredited public and private non-profit 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 half-time. 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 Dec. 31, 2001.
6 For more information, see CRS Report RL31129, Higher Education Tax Credits and Deduction: An Overview of the Benefits and Their Relationship to Traditional Student Aid, by Adam Stoll and Linda Levine; and CRS Report RL32155, Tax-Favored Higher Education Savings Benefits and Their Relationship to Traditional Federal Student Aid, by Linda Levine and Charmaine Mercer.
7 For information on the characteristics of contributors to Section 529 programs, see Investment Company Institute, Profile of Households Saving for College, fall 2003. (Hereafter cited as Investment Company Institute, Profile of Households Saving for College.)
8 Quarterly data on value of assets and number of contracts in each state-sponsored prepaid tuition program are available at [http://www.collegesavings.org].
9 Anne Tergesen, "Pay Now, Study Later," Business Week, Mar. 11, 2002.
10 Jeff Wuorio, Prepaying Tuition Offers Peace of Mind at a Price, available at [http://moneycentral.msn.com/articles/family/college/1462.asp].
11 Description of the Independent 529 Plan submitted to the Securities and Exchange Commission. Available online at [http://www.sec.gov/divisions/investment/noaction/ tuitionplan020403.htm].
12 See [http://www.Independent529plan.org] for additional information.
13 Andrew P. Roth, "Who Benefits from States' College-Savings Plans?" Chronicle of Higher Education, Jan. 1, 2001.
14 Lauren Paetsch, "Section 529 College Savings Plans More Attractive Due to 2001 Tax Law," Employee Benefit Plan Review, Feb. 2002.
15 Brian Hindo, "Shop Your Way to College Savings," Business Week, Mar. 11, 2002; and Kristin Davis, "College: We Did Your Homework to Find the Best Way to Save for College, Circa 2004," Kiplinger's Your Money, May 2004. (Hereafter cited as Davis, College: We Did Your Homework.)
16 Quarterly data on the value of assets and number of accounts in each state-sponsored college savings plan are available at [http://www.collegesavings.org]. Note: The number of accounts exceeds the number of beneficiaries because there is no limit to the number of accounts that can be established on behalf of a beneficiary.
17 Testimony of Daniel McNeela, Senior Analyst, Morningstar, Inc., in Investing for the Future: 529 State Tuition Savings Plans, Hearing before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, House Committee on Financial Services, 108th Congress, 2nd Sess., Serial No. 108-90 (June 2, 2004). (Hereafter cited as Morningstar testimony.)
18 Davis, College: We Did Your Homework, p. 72.
19 Lynn O'Shaughnessy, "Avoiding Fee Pitfalls as College Savings Climb," New York Times, July 13, 2003.
20 Investment Company Institute, Profile of Households Saving for College.
21 Howard Isenstein, "As College Plans Proliferate, It Pays to Shop Around," New York Times, June 20, 2004.
22Morningstar testimony.
23 [http://financialservices.house.gov/media/pdf/ 3-16-04%20529%20lttr%20part%20two_001.pdf].
24 The NASD is the major private-sector regulator the U.S. securities industry. The MSRB is the self-regulatory body that Congress created to develop rules governing broker-dealers and dealer banks that underwrite, trade, and sell municipal securities (e.g., sell interests in 529 college savings plans). Most of the municipal securities dealers regulated by the MSRB also are licensed broker-dealers regulated by NASD. NASD enforces the MSRB's rules pertaining to non-bank broker-dealers.
25 Testimony of Diana Cantor, Executive Director of the Virginia College Savings Plan and Chair of the College Savings Plan Network, Hearings before the Subcommittee on Capital Markets and Government Sponsored Enterprises, House Committee on Financial Services, 108th Congress, 2nd Sess., Serial No. 108-90 (June 2, 2004).
26 Testimony of Mary L. Schapiro, NASD, in Section 529 College Savings Plans: High Fees, Inadequate Disclosure, Disparate State Tax Treatment and Questionable Broker Sales Practices, Oversight Hearing Before the Subcommittee on Financial Management, the Budget, and International Security, Senate Committee on Governmental Affairs, 108th Congress, 2nd Sess., Serial 108-716, Sept. 30, 2004.
27 [http://www.nasd.com].
28 [http://www.msrb.org].
29 [http://www.sec.gov].
30 Sarah Max, "Are Prepaid Tuition Plans in Trouble?," CNN Money, Jan. 10, 2003. Available at [http://money.cnn.com/2003/01/07/pf/college/prepaid/index.htm]. See also Peter Schmidt, "Prepaid-Tuition Plans Feel the Pinch," Chronicle of Higher Education, Sept. 12, 2003.
31 Albert B. Crenshaw, "No Quick Fix for Section 529 Plans," Washington Post, June 6, 2004.
32 Davis, College: We Did Your Homework.
33 Ross Tucker, "Lining Up Behind 529s," Registered Rep, Mar. 24, 2003. Note: The group also intends to lobby Congress to make permanent the federal tax exemption on QTP earnings withdrawn to pay QHEEs and to allow QTP assets to be transferred more than once a year. It also wants to become an information resource concerning QTPs.
34 Jennifer Ma and Douglas Fore, "Saving for College with 529 Plans and Other Options: An Update," Research Dialogue, Issue no. 70, Jan. 2002.
35 Jennifer Ma, "The Impact of the 2003 Tax Law on College Savings Options," available at [http://www.tiaa-crefinstitute.org/Publications/pubarts/ pa073103.htm].
36 Joseph F. Hurley, "Planning Strategies Under the Education Provisions of the New Tax Act," Journal of Financial Planning, Sept. 2001.
37 Carol Marie Cropper and Anne Tergesen, "College Savings Plans Come of Age," Business Week, Mar. 12, 2001.
38 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).
39 Stephanie AuWerter, "The 529 Basics," SmartMoney.com, June 8, 2001. Available at [http://www.smartmoney.com/consumer/index.cfm?Story=200106083].
40 This is a per-beneficiary limit rather than a per-account limit. If more than one account of a beneficiary is rolled over in a 12-month period, it would represent a nonqualified distribution that is subject to taxation. Susan T. Brat, "Planning for College Using Section 529 Savings Accounts," The Practical Tax Lawyer, winter 2002.
41 Kristin Davis, "Miracle Grow," Kiplinger's Personal Finance, Sept. 2001, and [http://www.savingforcollege.com].
42 About 32 states allow parents to fund QTPs with money from custodial accounts. "Custodial" 529 plans retain some features of the original accounts (e.g., savings still belong to the child, and as a student's asset, the custodial 529 plans could have a more adverse effect on federal financial aid than other college savings plans). There also could be tax consequences to funding QTPs in this manner due to the requirement that QTPs accept only cash contributions (i.e., the sale of investments in custodial accounts could produce capital gains that would be subject to taxation). Penelope Wang, "Education: Yes, There's Still College," Money, Dec. 2001; and Anne Tergesen, "What About Those Custodial Accounts?" Business Week, Mar. 11, 2002.
43 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 the annual limit on gifts in one year or five times the annual limit the five-year option for QTPs is utilized.
44 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 reported financial situation.
45 Roth, Who Benefits from States' College-Savings Plans?
46 According to the U.S. Department of Education's Federal Student Aid Handbook, nontaxable earnings distributions from state-sponsored QTPs will not be included in student income (i.e., they will not be treated as untaxed income or as resources).
47 Peter Schmidt, "Bush Tax Cut Gives New Clout to States' College-Savings Plans," The Chronicle of Higher Education, June 22, 2001.
48 Margaret Clancy and Michael Sherraden, The Potential for Inclusion in 529 Savings Plans: Report on a Survey of States, Center for Social Development, George Warren Brown School of Social Work, Washington University in St. Louis, Dec. 2003.
49 For discussion of the relationship between education tax benefits and federal student aid see CRS Report RL32155, Tax-Favored Higher Education Savings Benefits and Their Relationship to Traditional Federal Student Aid, by Linda Levine and Charmaine Mercer; and CRS Report RL31129, Higher Education Tax Credits and Deduction: An Overview of the Benefits and Their Relationship to Traditional Student Aid, by Adam Stoll and Linda Levine.
END OF FOOTNOTES
Appendix Table 1. Comparison of State-Sponsored Prepaid Tuition
Plans
(as of November 24, 2003)
_____________________________________________________________________________
State and program name
Alabama (Prepaid Affordable College Tuition)
Date of operation and enrollment period
1990 (Sept.)
Age restriction on beneficiary
9th grade or younger
What is covered in the contract?
four years of undergraduate tuition and fees at state public
institutions
How is contract value determined if used for private or
out-of-state public institutions?
Average of four-year in-state public tuition and fees
Refund policy
Contract payments refundable plus up to 5% interest
Comments
$100 to enroll, benefits must be used within 10 years after the
projected college entrance date, no residency requirement
State and program name
Alaska (Advance College Tuition Payment Program)
Date of operation and enrollment period
1991 (anytime)
Age restriction on beneficiary
None
What is covered in the contract?
Credits can be used on tuition, fees, books, supplies,
equipment, room and board
How is contract value determined if used for private or
out-of-state public institutions?
Full value of the account
Refund policy
Full value of the account is refundable
Comments
Plan purchasers get full value of the earnings, benefits must be
used within 15 years of the projected college entrance date, no
residency requirement, guaranteed by the state
State and program name
Colorado (Colorado Prepaid Tuition Fund)
Date of operation and enrollment period
1997
Age restriction on beneficiary
not available
What is covered in the contract?
not available
How is contract value determined if used for private or
out-of-state public institutions?
not available
Refund policy
not available
Comments
Program not accepting contributions or new enrollments as of
Aug. 1, 2002
State and program name
Florida (Florida Prepaid College Program)
Date of operation and enrollment period
1987 (Nov.-Jan.)
Age restriction on beneficiary
Under 21 and less than 12th grade
What is covered in the contract?
Up to four years of undergraduate tuition and fees at state
public or private higher institutions, plus optional plans that cover
other local fees and dormitory
How is contract value determined if used for private or
out-of-state public institutions?
Average in-state public tuition and fees
Refund policy
Only contributions refunded, $50 fee for contracts less than two
years
Comments
$50 to enroll, benefits must be used within 10 years of the
projected college entrance date, guaranteed by the state
State
Illinois (College Illinois!)
Date of operation and enrollment period
1998 (Nov.-Mar.) (Newborns, Nov.-Aug.)
Age restriction on beneficiary
None
What is covered in the contract?
Up to nine semesters of tuition and fees at state public higher
institutions
How is contract value determined 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 less $100 fee (no
interest if contract is less than three years old)
Comments
$85 to enroll, three-year waiting period, benefits need to be
used within 10 years of projected college entrance date
State and program name
Kentucky (Affordable Prepaid Tuition Plan)
Date of operation and enrollment period
2001
Age restriction on beneficiary
Not available
What is covered in the contract?
Not available
How is contract value determined if used for private or
out-of-state public institutions?
Not available
Refund policy
Not available
Comments
Program temporarily closed, new enrollments suspended until June
30, 2004 at the earliest
State and program name
Maryland (Maryland Prepaid College Trust)
Date of operation and enrollment period
April 1998 (Nov.-Mar.) (Newborns anytime)
Age restriction on beneficiary
9th grade or younger
What is covered in the contract?
Up to five years of tuition and fees at state public
institutions
How is contract value determined if used for private or
out-of-state public institutions?
Weighted average in-state public tuition and fees
Refund policy
$75 cancellation fee. Refund is equal to 1) contributions and
90% of earnings/losses after three years; 2) contributions and 50% of
earnings/losses if cancelled within three years
Comments
$75 to enroll, up to $2,500 of contributions per taxpayer per
year state tax deductible, benefits must be used within 10 years of
projected high school graduation
State and program name
Massachusetts (U. Plan)
Date of operation and enrollment period
1995 (May-June)
Age restriction on beneficiary
10th grade or younger
What is covered in the contract?
Certificates worth up to four years of tuition and fees at the
highest cost institution among 81 participating institutions
How is contract value determined 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). However, certificates may be sold anytime.
Comments
Not a qualified 529 plan, but earnings are exempt from state
tax, no enrollment fee, no residency requirement, certificates must
be redeemed within six years of maturity, guaranteed by the state
State and program name
Michigan (Michigan Education Trust)
Date of operation and enrollment period
1988 (Dec.-April)
Age restriction on beneficiary
8th grade or younger for full benefit contract, 10th grade or
younger for limited benefit contract
What is covered in the contract?
Up to four years of tuition and fees at state public
institutions
How is contract value determined if used for private or
out-of-state public institutions?
Weighted average of in-state public tuition and fees
Refund policy
$100 cancellation fee. Only students who are 18 or have a high
school diploma may terminate contracts. Depending on the reason for
cancellation, refund value can be 1) the lowest; 2) the average; or
3) the weighted average of in-state public tuition
Comments
$60 enrollment fee, $25 to $85 application fee based on contact
postmark date, contributions state tax deductible if postmarked by
Dec. 31 of tax year, benefits must be used within nine years of
projected college entrance
State and program name
Mississippi (Prepaid Affordable College Tuition)
Date of operation and enrollment period
1997 (Sept.-Nov.) (Newborns anytime)
Age restriction on beneficiary
18 years or younger
What is covered in the contract?
Up to five years of undergraduate tuition and fees at state
public institutions
How is contract value determined if used for private or
out-of-state public institutions?
Weighted average in-state tuition and fees
Refund policy
Contributions and 90% of interest earnings refunded,
cancellation fee is the lesser of $25 or 50% of contributions
Comments
$60 to enroll, contributions state tax deductible, benefits must
be used within 10 years of projected enrollment date, guaranteed by
the state
State and program name
New Mexico (The Education Plan of New Mexico)
Date of operation and enrollment period
2000 (Sept.-Dec.) (Newborns anytime)
Age restriction on beneficiary
Contract must be purchased at least five years before projected
enrollment
What is covered in the contract?
Up to five years of tuition and fees at state public
institutions
How is contract value determined if used for private or
out-of-state public institutions?
The lesser of (1) the average in-state undergraduate tuition and
fees for the contract type, or (2) contributions plus a reasonable
rate of return
Refund policy
Contributions refunded, plus a reasonable rate of return (if
account has been open for at least five years)
Comments
No enrollment fee. All contributions deductible from state
income tax, for non-qualified withdrawals earnings subject to 20%
penalty, benefits must be used within 10 years of projected college
entrance date
State and program name
Nevada (Prepaid College Tuition Plan Trust Fund)
Date of operation and enrollment period
1998 (Oct.-Nov.) (Newborns anytime)
Age restriction on beneficiary
Under 18 and below 9th grade
What is covered in the contract?
Up to four years of tuition at state institutions
How is contract value determined if used for private or
out-of-state public institutions?
Weighted average tuition and fees at in-state public
institutions
Refund policy
Contributions and 90% of interest earnings refunded, up to $100
cancellation fee
Comments
$100 to enroll, benefits must be used within 10 years of
projected college entrance date or the age of 30, account owner must
be a state resident or alumnus of state college
State
Ohio (Ohio Prepaid Tuition Program)
Date of operation and enrollment period
1989 (Anytime)
Age restriction on beneficiary
Not available
What is covered in the contract?
Not available
How is contract value determined if used for private or
out-of-state public institutions?
Not available
Refund policy
Not available
Comments
Program permanently closed
State and program name
Pennsylvania (Tuition Account Program)
State and program name
1993 (Anytime)
Age restriction on beneficiary
None
What is covered in the contract?
Tuition credits for the chosen type of institutions
How is contract value determined if used for private or
out-of-state public institutions?
Full value of the contract
Refund policy
Only contributions refunded within 12 months. After, the refund
is the lesser of the market or full value of the contract, but no
less than contributions.
Comments
$50 to enroll, $25 annual maintenance fee, one-year waiting
period, must be used within 10 years of projected college entrance
date
State and program name
South Carolina (SC Tuition Prepayment Program)
Date of operation and enrollment period
1998 (Oct.-Jan.) (Newborns anytime)
Age restriction on beneficiary
10th grade or younger
What is covered in the contract?
Up to four years of tuition and fees at state public
institutions
How is contract value determined if used for private or
out-of-state public institutions?
The lesser of the value of the contract or the actual tuition
cost (plus $30 fee if school is out-of-state)
Refund policy
$100 cancellation fee. Contributions and 80% of earnings
refunded for contracts of more than one year.
Comments
$75 to enroll, benefits must be used before age 30,
contributions state tax deductible
State and program name
Tennessee (Tennessee BEST Tuition Plan)
Date of operation and enrollment period
1997 (Anytime)
Age restriction on beneficiary
None
What is covered in the contract?
Units can be purchased with each worth 1% of weighted average
tuition and fees at state public institutions
How is contract value determined if used for private or
out-of-state public institutions?
Weighted average in-state tuition and fees
Refund policy
Contributions + 50% earnings refunded minus $25 fee, no refund
before beneficiary is college age
Comments
Up to $42 to enroll, two-year waiting period
State and program name
Texas (Texas Guaranteed Tuition Plan)
Date of operation and enrollment period
1996 (Oct.-May)
Age restriction on beneficiary
Not available
What is covered in the contract?
Not available
How is contract value determined if used for private or
out-of-state public institutions?
Not available
Refund policy
Not available
Comments
Program closed to new enrollment, existing plan contracts remain
backed by the state
State and program name
Virginia (Prepaid Education Program)
Date of operation and enrollment period
1996 (Any time)
Age restriction on beneficiary
9th grade or younger
What is covered in the contract?
Up to five years of tuition at state public institutions
How is contract value determined 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 three years, only contributions refunded, less $100
penalty. After that, refund includes contributions plus a reasonable
rate of return
Comments
$85 to enroll, up to $2,000 per year state tax deductible, must
be used within 10 years after high school, guaranteed by the state
State and program name
Washington (Guaranteed Education Tuition)
Date of operation and enrollment period
1998 (Sept.-Mar.)
Age restriction on beneficiary
None
What is covered in the contract?
Up to five years of tuition units at the Univ. of Washington and
Washington State
How is contract value determined if used for private or
out-of-state public institutions?
Full value of the contract
Refund policy
$10 penalty, refund can be requested after two years of contract
being in effect, refund amount either the current value or the
weighted average tuition, subject to administrative fees
Comments
$50 to enroll, two-year waiting period, must be used within 10
years of projected enrollment date or the first use of the units
whichever is later, guaranteed by the state
State and program name
West Virginia (WV Prepaid College Plan)
Date of operation and enrollment period
1998
Age restriction on beneficiary
Not available
What is covered in the contract?
Not available
How is contract value determined if used for private or
out-of-state public institutions?
Not available
Refund policy
Not available
Comments
Program closed as of Dec. 31, 2002
Source: Reprinted from [http://www.tiaa-
crefinstitute.org/Data/statistics/pdfs/jma_prepaid.pdf], which relied
on information contained in [http://www.collegesavings.org
[http://www.savingforcollege.com
websites.
Note: Between Jan. 1, 2002 and Dec. 31, 2010, earnings in
Section 529 prepaid tuition plans are exempt from federal income tax
when used for QHEEs. Unless noted, earnings are exempt from
state income tax as well and state residency is required from Section
529 prepaid tuition plans. "Waiting period" is defined as the
amount of time an account needs to be open before qualified
withdrawals can be made without penalty.
Plans
(as of December 10, 2003)
State
Alabama
Name of the program
The Higher Education 529 Fund
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (enrollment-based): three enrollment-based
portfolios that shift away from equities and towards bonds and cash
over time. Option 2 (static portfolios): 100% equities; 100%
bonds, or 50% cash + 50% bonds. Option 3 (individual fund
portfolios): eight individual fund portfolios
Current lifetime account balance limit
$269,000
Estimated average annual expenses and other fees for directsold
plansb
$25 annual fee + between 0.90% and 1.24% underlying fund fee
State tax advantages
None
Commentsc
$25 annual fee reduced to $10 for state residents and waived for
accounts with a balance of at least $25,000. Nonresidents must open
an account through an advisor
State
Alaska
Name of the program
University of Alaska College Savings Plan
First date of operation
1991
Investment options for direct-sold plansa
Option 1 (enrollment-based): multiple enrollment-based
portfolios that shift away from equities and towards bonds and cash
over time. Option 2 (static portfolios): 100% equities; 100%
fixed-income; and 60% equities + 40% bonds, or 100% bond and money
market. Option 3 (advanced college tuition portfolio): prepaid
plan for University of Alaska
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for directsold
plansb
0.33% for Option 3. For other options, $30 annual fee + 0.30%
program fee + between 0.52% and 0.84% underlying fund fee
State tax advantages
State has no income tax
Commentsc
$30 annual fee waived for accounts with investment in Option 3,
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
1999
Investment options for direct-sold plansa
Option 1: CollegeSure CDs with at least 2% return and
FDIC insured up to $100,000. Option 2: Investors choose from
10 mutual funds including all-equity, all-bond, all-money-market, and
balanced funds
Current lifetime account balance limit
$187,000
Estimated average annual expenses and other fees for directsold
plansb
No fee for Option 1. For mutual funds, between 0.49% and 2.1%
underlying fund fee
State tax advantages
Earnings state income tax exempt
Commentsc
$10 to enroll for each mutual fund.
Maturity for 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
1999
Investment options for direct-sold plansa
Option 1 (age-based): 90% equities for youngest, 10%
equities for 19 and older. Option 2 (static portfolios):
growth, growth and income, balanced, and fixedincome portfolios with
100%, 75%, 50%, and 0% in equities, respectively
Current lifetime account balance limit
$245,000
Estimated average annual expenses and other fees for directsold
plansb
$25 annual fee + 0.60% management fee + between 0.70% and 1.38%
underlying fund fee
State tax advantages
Earnings state income tax exempt
Commentsc
$25 annual fee waived for state residents and accounts with a
balance of at least $25,000. Nonresidents must open an account
through an advisor
State
California
Name of the program
Golden State Scholar-Share Trust
First date of operation
1999
Investment options for direct-sold plansa
Option 1 (age-based): 80% equities for youngest, 20%
equities for 17 and older. Option 2 (aggressive age-based):
100% equities for youngest, 30% equities for 19 and older. Option
3: 100% equities. Option 4: 100% Social Choice equities.
Option 5: guaranteed with at least 3% return
Current lifetime account balance limit
$267,580
Estimated average annual expenses and other fees for directsold
plansb
No fee for Option 5. For other options, 0.80%
State tax advantages
Earnings state income tax exempt
Commentsc
An additional state tax of 2.5% will be imposed on earning of
non-qualified withdrawals. This additional tax applies to state
residents regardless which state's 529 plan the withdrawals are from
State
Colorado
Name of the program
Scholars Choice
First date of operation
1999
Investment options for direct-sold plansa
Option 1 (age-based): 80% equities for youngest, 10%
equities for 19 and older. Option 2 (years-to-enrollment-
based): 60% equities if more than 10 years from enrollment, 10%
equities if less than one year from enrollment. Option 3
(balanced): 50% equities + 50% bonds. Option 4: 100%
equities. Option 5: 100% fixed income. Option 6: 80%
equities + 20% fixed income. Option 7:80% fixed income + 20%
equities
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for directsold
plansb
$30 annual fee + between 0.99% and 1.09%
State tax advantages
All contributions state tax deductible.
Earnings state income tax exempt
Commentsc
$30 annual fee waived for state residents
State
Connecticut
Name of the program
Connecticut Higher Education Trust
First date of operation
1997
Investment options for direct-sold plansa
Option 1 (aged-based):80% equities for youngest, 20%
equities for 17 and older. Option 2 (high equity):80%
equities + 20% bonds. Option 3 (principal plus
interest):guaranteed with at least 3% return
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for directsold
plansb
No fee for Option 3. For other options, 0.79%
State tax advantages
Earnings state income tax exempt
State
Delaware
Name of the program
Delaware College Investment Plan
First date of operation
1998
Investment options for direct-sold plansa
Option 1 (age-based): 88% equities for youngest, 20%
equities for those already in college. Option 2: 100%
equities. Option 3: 70% equities + 30% bonds. Option
4: 45% bonds + 55% money market
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for directsold
plansb
$30 annual fee + 1.04%
State tax advantages
Earnings state income tax exempt
Commentsc
$30 annual fee waived for accounts with automatic payments or a
balance of at least $25,000
State
District of Columbia
Name of the program
DC College Savings Plan
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (age-based): 85% equities for youngest, 13%
equities for 17 and older. Option 2: Investors choose from six
mutual funds including all equity, all bond, and balanced funds.
Option 3 (stability of principal): guaranteed with at least 3%
return
Current lifetime account balance limit
$260,000
Estimated average annual expenses and other fees for directsold
plansb
$30 annual fee + 0.15% management fee + between 0.35% and 1.70%
underlying fund fee (no underlying fund fee for Option 3)
State tax advantages
Up to $3,000 per taxpayer per year District tax deductible (with
carryforward up to 5 subsequent years).
Earnings District tax exempt
Commentsc
$30 annual fee reduced to $15 for residents. $25 enrollment fee
for non-residents
State
Florida
Name of the program
Florida College Investment Plan
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (age-based): portfolios that shift away from
equities and towards fixed income and cash over time. Option
2: 100% equities. Option 3: 100% fixed income. Option
4: 100% money market. Option 5: 50% equities + 50% fixed
income
Current lifetime account balance limit
$283,000
Estimated average annual expenses and other fees for directsold
plansb
0.75%
State tax advantages
State has no income tax
Commentsc
$50 application fee (reduced to $30 for current Florida prepaid
plan participants)
State
Georgia
Name of the program
Georgia Higher Education Savings Plan
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (age-based): 80% equities for youngest, 15%
equities for 17 and older. Option 2 (aggressive age-based):
100% equities for youngest, 15% equities for 23 and older. Option
3: 100% equities. Option 4 (balanced): 50% equities + 50%
bonds. Option 5 (guaranteed): guaranteed with at least 3%
return
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for directsold
plansb
No fee for Option 5. For other options, 0.85%
State tax advantages
Up to $2,000 per beneficiary per year state tax deductible.
Earnings state tax exempt, if account has been open for more than a
year
Commentsc
State tax deductions phase out between $100,000 and $105,000 for
joint tax filers ($50,000 and $55,000 for single tax filers). For
nonqualified withdrawals, contributions for which previous state tax
deductions were taken will be subject to state income tax
State
Hawaii
Name of the program
Tuition-EDGE
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (age-based): 85% equities for youngest, 10%
equities for 18 and older. Option 2 (static): aggressive,
balanced, and conservative portfolios with 80%, 60%, and 40% in
equities, respectively. Option 3 (savings account option):FDIC
insured savings account
Current lifetime account balance limit
$297,000
Estimated average annual expenses and other fees for directsold
plansb
No fee for Option 3.
For other options, $25 + 0.95%
State tax advantages
Earnings state tax exempt
Commentsc
$25 annual fee waived for residents or accounts with balance of
at least $10,000. Non-residents must open an account through an
advisor
State
Idaho
Name of the program
Idaho College Savings Plan
First date of operation
2001
Investment options for direct-sold plansa
Option 1 (age-based): 75% equities for youngest, 10%
equities for 17 and older. Option 2: 100% equities. Option
3: guaranteed with at least 3% return
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for directsold
plansb
No fee for Option 3. For other options, 0.70%
State tax advantages
Up to $4,000 per taxpayer per year state tax deductible.
Earnings state tax exempt
Commentsc
The entire amount of a non-qualified withdrawal, including both
the earnings portion and the principal portion, will be included in
the owner's taxable income for state tax purposes
State
Illinoisd
Name of the program
Bright Start College Savings Plan
First date of operation
2000
Investment options for direct-sold plansa
Option 1 (age-based): 90% equities for youngest, 10%
equities for 18 and older. Option 2 (agebased with bank
deposits): similar to Option 1, with bank deposits. Option
3: 100% bonds. Option 4: 100% equities. Option
5: 50% bonds + 50% bank deposits. Option 6: principal
protection income portfolio
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for directsold
plansb
0.99%
State tax advantages
All contributions state tax deductible. Earnings exempt from
state tax
State
Indiana
Name of the program
College-Choice 529 Plan
First date of operation
1997
Investment options for direct-sold plansa
Option 1 (age-based): 90% equities for youngest, 100%
money market for 20 and older. Option 2 (static portfolios):
four portfolios with 100% equities, two with 100% bonds, one with
100% money market, one with 90% equities, one with 70% equities, one
with 50% equities, and one with 30% equities. Option 3
(individual fund portfolios): 8 individual fund portfolios
Current lifetime account balance limit
$236,750
Estimated average annual expenses and other fees for directsold
plansb
$30 annual fee + administrative fees + between 0.35% and 1.49%
underlying fund fees
State tax advantages
Earnings state income tax exempt
Commentsc
$30 annual fee reduced to $10 for residents, reduced to $25 for
accounts converted from former program, and waived for accounts with
automatic payments or $25,000 balance. $10 annual state authority fee
for non-residents. Very complicated fee structures
State
Iowa
Name of the program
College Savings Iowa
First date of operation
1998
Investment options for direct-sold plansa
Option 1(age-based): multiple portfolios available that
shift away from equities and towards fixed income and cash over time.
Option 2 (statistic portfolios): 8 portfolios including 100%,
80%, 60%, 40%, 20% equities; 100% bonds; 100% money market; and 80%
bonds + 20% money market, respectively
Current lifetime account balance limit
$239,000
Estimated average annual expenses and other fees for directsold
plansb
0.65%
State tax advantages
Up to $2,230 per taxpayer per year state tax deductible.
Earnings state tax exempt
Commentsc
Beneficiary must be 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 Program
First date of operation
2000
Investment options for direct-sold plansa
Option 1 (age-based):three agebased investment tracks
(aggressive, moderate, and conservative) available. Option 2 (two
static portfolios): 100% equities or 100% money market
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for directsold
plansb
$27 annual fee + 0.39% management fee + between 0.47% and 0.94%
underlying fund fee
State tax advantages
Up to $2,000 per taxpayer per beneficiary per year state tax
deductible. Earnings state tax exempt
Commentsc
12-month waiting period.e $27 annual waived for residents and
for accounts with a balance of at least $25,000
State
Kentucky
Name of the program
Education Savings Plan Trust
First date of operation
1990
Investment options for direct-sold plansa
Option 1 (age-based): 80% equities for youngest, 15%
equities for 17 and older. Option 2: 100% equities. Option
3: guaranteed with at least 3% return
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for directsold
plansb
No fee for Option 3. For other options, 0.80%
State tax advantages
Earnings state tax exempt
Commentsc
A 1% Kentucky penalty applies to non-qualified withdrawals
State
Louisiana
Name of the program
Louisiana START
First date of operation
1997
Investment options for direct-sold plansa
State treasurer's office invests mostly in fixed income
securities
Current lifetime account balance limit
$197,600
Estimated average annual expenses and other fees for directsold
plansb
None
State tax advantages
Up to $2,400 per beneficiary per year state tax deductible with
carryforward. Earnings state tax exempt
Commentsc
Residency required. 12-month waiting period.e Up to 14% matching
grant available for accounts with at least $100 contributions during
the year
State
Mainef
Name of the program
NextGen College Investing Plan
First date of operation
1999
Investment options for direct-sold plansa
Option 1 (age-based): 90% equities for youngest, 10%
equities for 20 and older. Option 2: 100% equities. Option
3: 75% equities + 25% fixed income. Option 4: 100% fixed
income
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for directsold
plansb
$50 annual fee + 0.55% management fee + between 0.77% and 1.12%
underlying fund fee
State tax advantages
Earnings state tax exempt
Commentsc
$50 annual fee reduced to $25 for payroll deposits and waived
for residents, accounts with annual contributions of at least $2,500,
or a balance of at least $20,000. Up to $200 initial matching grant
and up to $100 annual matching grant available for families whose
adjusted gross income is less than $50,000
State
Maryland
Name of the program
Maryland College Investment Plan
First date of operation
2001
Investment options for direct-sold plansa
Option 1 (age-based): multiple age-based portfolios
available that shift away from equities and towards fixed income and
cash over time. Option 2: 100% equities. Option 3: 100%
bonds. Option 4: 60% equities + 40% bonds
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for directsold
plansb
$30 annual fee + 0.38% management fee + between 0.35% and 0.96%
underlying fund fee
State tax advantages
Up to $2,500 per account per year state tax deductible (with
carryforward up to 10 succeeding years).
Commentsc
Earnings state tax exempt $90 to enroll (may be reduced under
certain conditions). $30 annual fee waived for accounts with
automatic contributions or a balance of at least $25,000
State
Massachusetts
Name of the program
U. Fund
First date of operation
1999
Investment options for direct-sold plansa
Option 1 (age-based): 86% equities for youngest, 20%
equities for those already in college. Option 2: 100%
equities. Option 3: 70% equities + 30% bonds. Option
4: 45% bonds + 55% money market
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for directsold
plansb
$30 annual fee + 1.03%
State tax advantages
Earnings state tax exempt
Commentsc
$30 annual fee waived for accounts with automatic contributions
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 for direct-sold plansa
Option 1 (age-based): 72% equities for youngest, 13-15%
equities for 17 and older. Option 2: 100% equities. Option
3: guaranteed with at least 3% return
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for directsold
plansb
No fee for Option 3. For other options, 0.65%
State tax advantages
Up to $5,000 per taxpayer per year state tax deductible.
Earnings state tax exempt
Commentsc
One-third matching grant (up to $200) available for new accounts
with a state resident beneficiary who is 6 or younger, and whose
family income is less than $80,000
State
Minnesota
Name of the program
Minnesota College Savings Plan
First date of operation
2001
Investment options for direct-sold plansa
Option 1 (age-based): 72% equities for youngest, 13-15%
equities for 17 and older. Option 2: 100% equities. Option
3: guaranteed with at least 3% return
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for direct-sold
plansb
No fee for Option 3. For other options, 0.65%
State tax advantages
Earnings state tax exempt
Commentsc
For accounts with at least $200 contributions made during the
year, 15% state matching grant is available for state residents with
family income less than $50,000 (5% matching rate for family income
between $50,000 and $80,000). Annual maximum grant is $300 per
beneficiary
_____________________________________________________________________
State
Mississippid
Name of the program
Mississippi Affordable College Savings
First date of operation
2001
Investment options for direct-sold plansa
Option 1 (age-based): 72% equities for youngest, 18%
equities for 17 and older. Option 2: 100% equities. Option
3: guaranteed with at least 3% return
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for direct-sold
plansb
No fee for Option 3. For other options, 0.60% management fee +
between 0-16% and 0-23% underlying fund fee
State tax advantages
Up to $10,000 per taxpayer per year state tax deductible.
Earnings state tax exempt
_____________________________________________________________________
State
Missouri
Name of the program
MO$T (Missouri Saving for Tuition Program)
First date of operation
1999
Investment options for direct-sold plansa
Option 1 (age-based): 72% equities for youngest, 13-15%
equities for 17 and older. Option 2: 100% equities.
Option 3: guaranteed with at least 3% return
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for direct-sold
plansb
No fee for Option 3. For other options, 0.65%
State tax advantages
Up to $8,000 per taxpayer per year state tax deductible.
Earnings state tax exempt
_____________________________________________________________________
State
Montana
Name of the program
Montana Family Education Savings Program
First date of operation
1998
Investment options for direct-sold plansa
Option 1: CollegeSure CDs issued by College Savings Banks
with at least 2% return (maturity of CDs needs to coincide with the
expected years of college attendance), FDIC insured up to $100,000
per account. Option 2: investors choose from 15 individual
mutual funds and 5 static portfolios
Current lifetime account balance limit
$262,000
Estimated average annual expenses and other fees for direct-sold
plansb
No fee for Option 1. For Option 2, $25 annual fee (waived for
accounts with automatic payments or a balance of at least $25,000) +
underlying fund fees
State tax advantages
Up to $3,000 per taxpayer per year state tax deductible.
Earnings exempt from state tax
Commentsc
State tax deductions will be recaptured at the highest state
income tax rate if withdrawals are not used for higher education or
if withdrawals are made within three years of account opening
_____________________________________________________________________
State
Nebraska
Name of the program
Nebraska College Savings Plan
First date of operation
2001
Investment options for direct-sold plansa
Option 1 (age-based): multiple age-based
portfolios that shift away from equities and toward fixed income and
cash over time. Option 2: six target portfolios with 100%,
80%, 60%, 40%, 20%, and 0% equities, respectively. Option 3:
22 individual fund portfolios
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for direct-sold
plansb
$20 annual fee + 0.60% management fee + up to 1.17% underlying
fund fee
State tax advantages
Up to $1,000 per year state tax deductible ($500 if married
filing separately). Earnings state tax exempt
_____________________________________________________________________
State
Nevada
Name of the program
The Strong 529 Plan
First date of operation
2001
Investment options for direct-sold plansa
Option 1 (age-based): three agebased portfolios that
shift away from equities and towards fixed income and cash over time.
Option 2 (aggressive): 90% equities. Option 3
(moderate): 65% equities. Option 4 (balanced): 50%
equities. Option 5 (conservative): 30% equities.
Option 6 (all bond): 100% bonds
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for direct-sold
plansb
$10 annual fee + 1.25% (0.85% for Option 6)
State tax advantages
State has no income tax
Commentsc
$10 to enroll
_____________________________________________________________________
State
New Hampshire
Name of the program
Unique College Investing Plan
First date of operation
1998
Investment options for direct-sold plansa
Option 1 (age-based): 86% equities for youngest, 20%
equities for those already in college. Option 2: 100%
equities. Option 3: 70% equities + 30% bonds. Option
4: 45% bonds + 55% money market
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for direct-sold
plansb
$30 annual fee + 1.04%
State tax advantages
State has no income tax. Earnings exempt from state interest and
dividends tax
Commentsc
$30 annual fee waived for accounts with automatic contributions
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
1998
Investment options for direct-sold plansa
Option 1 (age-based): 100% equities for the youngest, 0%
equities for 21 and older. Option 2: three 100% equity
portfolios. Option 3: 50% equities. Option 4:
80% fixed income + 20% cash. Option 5: 100% fixed income
Current lifetime account balance limit
$305,000
Estimated average annual expenses and other fees for direct-sold
plansb
0.40% management fee + between 0.45% and 1.17% underlying fund
fee
State tax advantages
Earnings exempt from state tax
Commentsc
Residency required. Between $500 and $1,500 scholarship for
college in NJ available for accounts that have been open for more
than four years and with at least $1,200 contributions
_____________________________________________________________________
State
New Mexico
Name of the program
The Education Plan's College Savings Program
First date of operation
2000
Investment options for direct-sold plansa
Option 1 (age-based): 85% equities for youngest, 20%
equities for 19 and older. Option 2: 100% equities. Option
3: 100% bonds. Option 4: 100% money market. Option
5: five other static portfolios with 85%, 70%, 55%, 40%, and 20%
in equities, respectively
Current lifetime account balance limit
$294,000
Estimated average annual expenses and other fees for direct-sold
plansb
$30 annual fee + 0.30% management fee + between 0.53% and 1.22%
underlying fund fee
State tax advantages
All contributions state tax deductible. Earnings exempt from
state tax
Commentsc
one-year waiting period.e $30 annual fee waived for residents,
accounts with automatic contributions 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
1998
Investment options for direct-sold plansa
Option 1 (age-based): 65% equities for youngest, 100%
income for 19 and older. Option 2 (aggressive
age-based): 100% equities for youngest, 35% equities for 16-18,
100% income for 19 and older. Option 3 (conservative): 50%
equities for youngest, 100% money market for 19 or older. Option
4: 12 static portfolios, 8 of which invest in a single mutual
fund, and 4 of which invest in a blend of funds
Current lifetime account balance limit
$235,500
Estimated average annual expenses and other fees for direct-sold
plansb
0.55% to 0.60% allinclusive management fee, decreasing as
program assets increase
State tax advantages
Up to $5,000 per taxpayer per year state tax deductible.
Earnings exempt from state tax
Commentsc
three-year waiting period.e Starting 2003, rollovers
from NY's 529 plan to another state's plan will be considered non-
qualified withdrawals for NY income tax, meaning the earnings and the
contributions for which previous state tax deductions were taken will
be subject to state income tax
_____________________________________________________________________
State
North Carolinad
Name of the program
North Carolina's National College Savings Program
First date of operation
1998
Investment options for direct-sold plansa
Option 1 (age-based): portfolios that shift away from
equities and towards fixed income and cash over time. Option
2: 100% equities. Option 3 (balanced): 40% equities + 60%
fixed income. Option 4 (income fund): 100% fixed income.
Option 5 (protected stock fund): guaranteed with a 3%
return per year or 70% of the gain in the S&P 500 Price Index over
five years, whichever is greater. Option 6: any of the 22
portfolios used in the age-based option
Current lifetime account balance limit
$276,046
Estimated average annual expenses and other fees for direct-sold
plansb
$25 annual fee + 0.25% management fee (0.10% for Option 1) +
between 0.05% and 1.28% underlying fund fee
State tax advantages
Earnings state income tax exempt
Commentsc
$25 waived for accounts with automatic contributions or a
balance of more than $1,000. Option 5 requires a lump-sum minimum
contribution of $1,000 for a five-year period. Non-residents must
open an account through an advisor
_____________________________________________________________________
State
North Dakota
Name of the program
College SAVE
First date of operation
2001
Investment options for direct-sold plansa
Option 1 (age-based): multiple age-based portfolios that
shift away from equities and towards fixed income and cash over time.
Option 2 (static portfolios): two aggressive growth portfolios
with 90% equities and two balanced portfolios with 50% equities and
50% bonds
Investment options for direct-sold plansa
$269,000
Estimated average annual expenses and other fees for direct-sold
plansb
$30 annual fee + 0.50% management fee + between 0.68% and 1.22%
underlying fund fee
State tax advantages
Earnings state income tax exempt
Commentsc
$30 annual fee and 0.50% management fee waived for state
residents
_____________________________________________________________________
State
Ohio
Name of the program
College Advantage Savings Plan
First date of operation
1989
Investment options for direct-sold plansa
Option 1 (age-based): 85% equities for youngest, 15%
equities for 21 and older. Option 2 (balanced): 60%
equities + 30% bonds + 10% cash. Option 3 (growth): 85%
equities + 15% bonds. Option 4 (aggressive growth):
100% equities. Option 5: 13 single-fund portfolios.
Option 6: Guaranteed Savings Fund that is essentially a
prepaid plan
Current lifetime account balance limit
$245,000
Estimated average annual expenses and other fees for direct-sold
plansb
No fee for Option 6. For others, 0.55% to 1.34%
State tax advantages
Up to $2,000 per tax return per year state tax deductible, with
unlimited carry-forward in future years. Earnings state tax exempt
Commentsc
Residency required for Option 6. Other options are available to
non-residents through an advisor. Beneficiary must be 18 or older
when prepaid tuition units are redeemed
_____________________________________________________________________
State
Oklahoma
Name of the program
Oklahoma College Savings Plan
First date of operation
2000
Investment options for direct-sold plansa
Option 1 (age-based): 72% equities for youngest, 18%
equities for 17 and older. Option 2: 100% equities. Option
3: guaranteed with at least 3% return
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for direct-sold
plansb
No fee for Option 3. For other options, 0.55% management fee +
between 0.11% and 0.13% underlying fund fee
State tax advantages
Up to $2,500 per account state tax deductible. Earnings state
tax exempt
_____________________________________________________________________
State
Oregon
Name of the program
Oregon College Savings Plan
First date of operation
2001
Investment options for direct-sold plansa
Option 1 (age-based): 90% equities when 10 years or more
away from college, 10% equities when in college. Option 2
(static): six portfolios with 100%, 90%, 60%, 50%, 30% and 10% in
equities, respectively
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for direct-sold
plansb
$30 annual fee + 1.25% (0.975% for the 100%-equity portfolio)
State tax advantages
$2,000 per year state tax deductible ($1,000 if married filing
separately). Earnings state tax exempt
Commentsc
$30 annual fee waived for state residents, accounts with
automatic payments, or a balance of at least $25,000
_____________________________________________________________________
State
Pennsylvaniad
Name of the program
TAP 529 Investment Plan
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (age-based): 85% equities for youngest, 10%
equities for 19 and older. Option 2 (agebased): 100% equities
for youngest, 10% equities for 19 and older. Option 3
(risk-based): five static portfolios with 100%, 80%, 60%, 40%, 0%
in equities, respectively. Option 4 (socially responsible):
one bond portfolio and one equity portfolio
Current lifetime account balance limit
$290,000
Estimated average annual expenses and other fees for direct-sold
plansb
$25 annual fee + 0.35% management fee + between 0.45% and 1.69%
underlying fund fee
State tax advantages
Earnings state tax exempt
Commentsc
$25 annual fee waived for accounts with automatic contributions
or a balance of at least $20,000. Nonresidents must open an account
through an advisor
_____________________________________________________________________
State
Rhode Island
Name of the program
College-Bound Fund
First date of operation
1998
Investment options for direct-sold plansa
Option 1 (age-based): 100% equities for youngest, 25%
equities for 19 and older. Option 2 (age-based):
similar to Option 1, with more equities. Option 3: 100%
equities (invested in aggressive funds). Option 4: 100%
equities (invested in growth funds). Option 5: 60% equities +
40% fixed income. Option 6: 100% fixed income. Option
7: 9 single-fund portfolios
Current lifetime account balance limit
$301,550
Estimated average annual expenses and other fees for direct-sold
plansb
$25 annual fee + between 0.70% and 1.67% underlying fund fee
State tax advantages
Up to $500 per taxpayer per year state tax deductible with
carryforward to future years. Earnings state tax exempt
Commentsc
$25 annual fee waived for state residents, accounts with
automatic contributions or a balance of at least $25,000.
Nonresidents must open an account through an advisor
_____________________________________________________________________
State
South Carolina
Name of the program
Future Scholar 529 College Savings Plan
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (age-based): 100% equities for youngest, 15%
equities for 18 and older. Option 2: six portfolios with
different equity exposures. Option 3: three singlefund
portfolios
Current lifetime account balance limit
$265,000
Estimated average annual expenses and other fees for direct-sold
plansb
$25 annual fee + 0.20% management fee + between 0.20% and 1.23%
underlying fund fee
State tax advantages
All contributions state tax deductible. Earnings state tax
exempt
Commentsc
$25 annual fee waived for state residents and employees.
Nonresidents must open an account through an advisor
_____________________________________________________________________
State
South Dakota
Name of the program
College Access 529
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (age-based): 85% equities for youngest, 5%
equities for 18 and older. Option 2 (real return plus
portfolio): 100% fixed-income
Current lifetime account balance limit
$305,000
Estimated average annual expenses and other fees for direct-sold
plansb
0.65% for Option 1, 0.53% for Option 2
State tax advantages
State has no income tax
Commentsc
Non-residents must open an account through an advisor
_____________________________________________________________________
State
Tennesseef
Name of the program
Tennessee BEST Investment Savings Program
First date of operation
2000
Investment options for direct-sold plansa
Option 1 (age-based): 75% equities for youngest, 10%
equities for 17 and older. Option 2: 100% equities
Current lifetime account balance limit
$235,000
Estimated average annual expenses and other fees for direct-sold
plansb
0.95%
State tax advantages
State has no income tax. Earnings exempt from state interest and
dividends tax
_____________________________________________________________________
State
Texas
Name of the program
Tomorrow's College Investment Plan
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (age or enrollmentbased): 90% equities for
youngest, 15% equities for 15 and older. For adult beneficiaries, 90%
equities for 15 or more years away from enrolling in college, 15%
equities if within two years of enrolling. Option 2: 60%
equities + 40% fixed income. Option 3: 100% equities.
Option 4: single-fund options that offer 13 portfolios
focusing on a single investment strategy or asset class
Current lifetime account balance limit
$257,460
Estimated average annual expenses and other fees for direct-sold
plansb
$30 annual fee + 1.0% for the agebased and blended portfolios,
0.45% for the stable value and single fund portfolios
State tax advantages
State has no income tax
Commentsc
$30 annual fee waives for state residents and accounts with
automatic contributions or a balance of at least $25,000.
Nonresidents must open an account through an advisor
_____________________________________________________________________
State
Utah
Name of the program
Utah Educational Savings Plan Trust
First date of operation
1997
Investment options for direct-sold plansa
Option 1: 100% State Treasurer's Investment Fund, which
invests in money market securities. Option 2: 100%
index equities. Option 3: 100% bonds. Option 4: 100%
diversified equities. Option 5-9 (age-based): multiple
age-based portfolios available that shift away from equities and
towards fixed income and cash over time
Current lifetime account balance limit
$280,000
Estimated average annual expenses and other fees for direct-sold
plansb
No fee for Option 1. For other options, up to $25 annual fee +
0.25% management fee if balance is greater than $5,000 (0.75%
otherwise) + between 0.0275% and 0.65% underlying fund fee
State tax advantages
Up to $1,435 per beneficiary per taxpayer per year state tax
deductible (account must be opened before the beneficiary turns 19
for this benefit) Earnings state tax exempt.
Commentsc
Only contributions (up to the current balance) are refunded if
account is cancelled within two years of opening. Benefit payout must
begin before the beneficiary turns 27, or 10 years after opening the
account, whichever is later
_____________________________________________________________________
State
Vermont
Name of the program
Vermont Higher Education Savings Plan
First date of operation
1999
Investment options for direct-sold plansa
Option 1 (age-based): 80% equities for youngest, 15%
equities for 17 and older. Option 2: 100% equities. Option
3 (interest income option): 100% fixed-income securities
Current lifetime account balance limit
$240,100
Estimated average annual expenses and other fees for direct-sold
plansb
No fee for Option 3. 0.80% for others.
State tax advantages
Contributions made after 2003 are eligible for a tax credit that
is 5% of contributions of up to $2,000 per beneficiary. Earnings
state tax exempt
Commentsc
Tax credit will be recaptured for nonqualified withdrawals
_____________________________________________________________________
State
Virginia
Name of the program
Virginia Education Savings Trust
First date of operation
1999
Investment options for direct-sold plansa
Option 1 (age-based portfolios): multiple age-based
portfolios available that shift away from equities and towards fixed
income and cash over time. Option 2: 80% equities + 20% fixed
income. Option 3: 60% equities + 40% fixed income. Option
4: 20% equities + 80% fixed income. Option 5: 100% money
market
Current lifetime account balance limit
$250,000
Estimated average annual expenses and other fees for direct-sold
plansb
Between 0.85% and 1.0%
State tax advantages
Up to $2,000 per account per year state tax deductible with
unlimited carry-forward in future years. Unlimited state tax
deduction for owners 70 and older. Earnings state tax exempt
Commentsc
$85 to enroll. 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
West Virginia
Name of the program
Smart 529 Plan
First date of operation
2002
Investment options for direct-sold plansa
Option 1 (age-based): 100% equities for youngest, 20%
equities for 19 and older. Option 2: 100% equities. Option
3: 80% equities + 20% bonds. Option 4: 60% equities + 30%
bonds + 10% stable value portfolio. Option 5 (stable value
portfolio): aims to preserve principal and interest income
Current lifetime account balance limit
$265,620
Estimated average annual expenses and other fees for direct-sold
plansb
$25 annual fee + 1.16%
State tax advantages
All contributions state tax deductible. Earnings state tax
exempt
Commentsc
$25 annual fee waived for state residents and accounts with
automatic contributions or a balance of at least $25,000.
Nonresidents must open an account through an advisor
_____________________________________________________________________
State
Wisconsin
Name of the program
EDVEST Wisconsin College Savings Program
First date of operation
1997
Investment options for direct-sold plansa
Option 1 (age-based): 90% equities for youngest, 100%
bonds for those who are less than two years away from college.
Option 2: 100% index equities. Option 3: 90% equities +
10% bonds. Option 4: 70% equities + 30% bonds. Option
5: 50% equities + 50% bonds. Option 6: 100% bonds.
Option 7 (stable value portfolio): primarily invested
in government bonds
Current lifetime account balance limit
$246,000
Estimated average annual expenses and other fees for direct-sold
plansb
$10 annual fee + 1.15% asset-based fee (0.90% for Option 7)
State tax advantages
Up to $3,000 per beneficiary per year state tax deductible.
Earnings state tax exempt
Commentsc
$10 enrollment fee per portfolio (waived for accounts opened
through an employedsponsor plan). $10 annual fee waived for accounts
with automatic contributions or with a balance of at least $25,000
_____________________________________________________________________
State
Wyoming
Name of the program
Wyoming College Achievement Plan
First date of operation
2000
Investment options for direct-sold plansa
Option 1 (age-based): 90% equities for youngest, 10%
equities for 22 and older. Option 2: 100% equities. Option
3: 75% equities + 25% fixed income. Option 4: 50% equities
+ 50% fixed income. Option 5: 100% fixed income
Current lifetime account balance limit
$245,000
Estimated average annual expenses and other fees for direct-sold
plansb
$25 annual fee + 0.95% management fee + between 0.85% and 1.45%
underlying fund fee
State tax advantages
State has no income tax
Commentsc
$25 annual fee waived for state residents or accounts with a
balance of at least $25,000
_____________________________________________________________________
Source: Reprinted from
[http://www.tiaa-crefinstitute.org/Data/statistics/pdfs/
jma_savingsplans.pdf], which relied on information contained in
[http://www.collegesavings.org
as well as in various states' websites.
FOOTNOTES TO TABLE
a The investment options listed in this table refer to
those available to accounts opened directly through the program. More
options may be available for accounts opened through an advisor or
broker.
b Estimated expense charges apply to accounts opened
directly through the program. Additional and/or higher fees may apply
to accounts opened through brokers.
c The earnings of non-qualified withdrawals are subject
to income tax at the distributee's rate in addition to a 10% federal
penalty tax.
d Earnings on qualified withdrawals are subject to
state tax if withdrawals are from an out-of-state plan.
e "Waiting period" is defined as the amount of time an
account needs to be open before qualified withdrawals can be made
without penalty.
f Earnings on qualified withdrawals are subject to
state interest and dividend tax if withdrawals are from an
out-of-state plan.
- AuthorsLevine, Linda
- Institutional AuthorsCongressional Research Service
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-20955
- Tax Analysts Electronic Citation2006 TNT 196-15