The Report Card - evaluating states' tuition plans

Kiplinger's Personal Finance Magazine, Feb, 1999

THE PLANS BELOW represent three varieties: prepaid-tuition plans with a contract that requires you to pay a set amount at regular intervals; prepaid-tuition plans with tuition credits, each worth a percentage of future tuition and fees; and college-savings plans, which operate like savings accounts or mutual funds and aren't pegged to future tuition increases.

We've given the best grades 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 such as deductible contributions or tax-free earnings.

Plans marked with a $ accept investments from residents of any state. Unless noted, the money can be used at any accredited college without penalty. For more complete descriptions, see www.kiplinger .com (click on "Personal Finances"). For links to state sites, go to the College Savings Plans Network site, at www.collegesavings.org.

ALABAMA C-

Prepaid Affordable College Tuition 800-252.7228

Enrollment: September; beneficiary must be in the ninth grade or younger

Type: prepaid (contract)

If the account is not used for college expenses, you receive your contributions minus a fee of up to $150, with no interest. Alabama does not back its plan with a guarantee.

ALASKA B

Advance College Tuition 800-478.0003 (in Alaska)

Enrollment: anytime

Type: prepaid (credits)

Unlike most prepaid plans, Alaska's has a kicker: If the state earns more on your contributions than it needs to cover rising tuition costs, you keep the difference. If the state fund--invested roughly one-third in stocks and two-thirds in bonds--underperforms, you're still guaranteed full tuition at the University of Alaska.

COLORADO B-

$ Prepaid Tuition Fund 800-478-5651

Enrollment: October to December (newborns anytime)

Type: prepaid (hybrid)

You buy tuition "units," but pay either in a lump sum or on a schedule. Colorado is serious about forced saving: If you don't keep up payments, your contract is subject to cancellation. There are no refunds until the scheduled payout date (unless your child dies or becomes disabled). Earnings are exempt from state taxes, but the plan has no guarantee.

CONNECTICUT A-

Higher Education Trust 888-799-2438

Enrollment: anytime

Type: savings

Connecticut invests your money with managers at Aeltus, Lazard Freres, Montgomery Asset Management and J.P. Morgan. The investment mix changes with a age: Up to age 6, the money is 90% in stocks and 10% in bonds. By age 17, it's the reverse.

DELAWARE A-

$ College Investment Plan 800-544.1655

Enrollment: anytime

Type: savings

This plan invests in Fidelity funds, with an asset mix that changes based on the age of the beneficiary. You can accrue up to $112,950 (to be adjusted annually for inflation).

FLORIDA C-

Prepaid College Program 800-552-4723

Enrollment: October through January; 11th grade or younger

Type: prepaid (contract)

Contributions are guaranteed to keep pace with tuition costs in Florida only if the student attends a public or private college in-state. Earnings are capped at 5% if the funds are used out of state--or if the child dies, becomes disabled or doesn't need the account because of a scholarship. For refunds, you get contributions back with no interest.

ILLINOIS C

College Illinois Prepaid Tuition Program 877-877-3724

Enrollment: October through January

Type: prepaid (contract)

In-state tuition is guaranteed. Earnings are exempt from state taxes. Penalties are heavy if the money isn't used for college: You get contributions plus 2% interest minus a cancellation fee.

INDIANA A-

$ Family College Savings Plan 888-814-6800

Enrollment: anytime

Type: savings

You can contribute up to $9,405 a year ($100,000 overall), invested in the Pegasus Managed Assets series of mutual funds. Until age 12, contributions are invested in the portfolio's growth fund, which is 80% invested in stocks and 20% in bonds and returned an annualized 10.7% in its first two years. By age 18, the stock allocation shifts to 20%.

IOWA A

College Savings Iowa 888-446-6696

Enrollment: anytime, up to age 17

Type: savings

Iowa's plan invests in Vanguard LifeStrategy Portfolios, with assets gradually shifting from mostly stocks to mostly bonds. Each contributor can invest a state-tax-deductible $2,000 per year per child. Earnings are free of state taxes.

Bonuses: Expenses are a superlow 0.29% of assets, and Iowa charges no additional fees. In addition, participants receive earnings of a state-sponsored endowment fund.

KENTUCKY B

Educational Savings Plan Trust 800-338-0318

Enrollment: anytime, up to age 15

Type: savings

A good spot for a high schooler's college savings, the trust avoids stocks and has earned contributor's nearly 6% in each of the past three years. You're guaranteed a minimum return of 4%. Proceeds are free from state income taxes.

LOUISIANA A-

START Saving Program 800-259-5626

Enrollment: July through October, (newborns anytime)

Type: savings

This plan is like a tax-deferred savings account with a matching grant. Your contributions earn interest (6% in 1998) plus--if family income is less than $100,000--a grant of 4% to 14% of your contribution. The catch: You keep the grant and the interest it earns only if the student stays in Louisiana. Otherwise, you receive interest only (free from state tax).