How to Ace Saving for College - state-sponsored savings plans for college

Kiplinger's Personal Finance Magazine, Feb, 1999 by Kristin Davis, Margaret Ringer

College-savings plans, now available in 15 states, offer that potential. They can significantly outpace tuition inflation--though if the market tanks, so may your college fund.

In evaluating the 34 state-sponsored plans, we considered both the potential return on your investment and--for prepaid plans--whether the state backs the plan with a guarantee, meaning the state would make up any shortfall should its investment pool fail to earn enough to cover rising costs. Without a guarantee, you'll get what the state earned, which may not fully cover tuition.

Our top grades went to plans with the potential for high returns, maximum flexibility to use the proceeds at any accredited U.S. school, reasonable penalties for noneducation withdrawals, and state-tax benefits.

Other criteria we considered:

* Are contributions flexible? While you may like the idea of forced savings, the consequences can be harsh if you can't keep up installment payments: In many contract plans, the state may cancel your account and return your money, minus a penalty for refunds.

* Can you save enough? With some plans you can save only enough to cover tuition and fees at a public college in your state, which may be less than half the total cost of attendance for boarders. In some states, even a four-year contract might cover only one semester if used at a private college. Newer plans tend to have high maximums--$100,000 in Indiana, for example--or no maximum at all.

* How steep are the fees? Many plans have a nonrefundable enrollment fee; $50 is typical. Some add monthly account-maintenance fees and administrative fees (for transferring the account to another beneficiary, for instance). Most savings plans also charge an asset-management fee, which is reflected in the return credited to your account. The prospectus fin. each plan should provide details on all potential tees.

* What's the impact on financial aid? Though Congress may eventually change the rules, prepaid plans are treated more severely than savings plans under federal financial-aid formulas. Prepaid plans are considered a "resource" that reduces a family's aid eligibility dollar for dollar. Savings plans are treated as a parental asset, of which only 5.6% is considered available to cover college costs each year.