Order Code RL31214
CRS Report for Congress
Received through the CRS Web
Saving for College Through Qualified Tuition
(Section 529) Programs
December 17, 2001
Linda Levine
Specialist in Labor Economics
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Saving for College Through Qualified Tuition
(Section 529) Programs
Summary
Congress has tried to make higher education more affordable through favorable
tax treatment of qualified tuition programs (QTPs) at Section 529 of the Internal
Revenue Code. QTPs allow individuals to save for qualified higher education
expenses at eligible institutions. One type of QTP — prepaid tuition plans — enables
account owners (e.g., parents) to make payments on behalf of beneficiaries (e.g., their
children) for a specified number of academic periods or course units at current prices.
Prepaid tuition programs thus provide a hedge against tuition inflation. Only states
had been permitted to sponsor tax-exempt prepaid tuition plans until P.L. 107-16
extended sponsorship to private institutions effective in 2002. States remain the sole
tax-exempt sponsor of the other type of QTP, college savings plans. Generally, funds
in college savings plans can be used toward a variety of qualified expenses at any
eligible institution regardless of which state sponsors the plan or where the
contributor resides. In contrast, funds in state-sponsored prepaid plans typically are
meant to cover tuition and fees at public postsecondary schools within the state. Also
unlike prepaid plans, in which the intent is that pooled contributions are invested to
at least match the increase in tuition, each owner of a college savings account usually
can select one of a number of investment strategies (e.g., aggressive growth) in which
to place contributions. Consequently, college savings plans offer the possibility of
greater returns than prepaid tuition plans, but they also could prove more risky.
Both types of QTPs have several features in common. Contributions are not
deductible on federal tax returns. Earnings accumulate tax-deferred until withdrawn.
If they are used to pay college expenses, the earnings are tax-free effective 2002 for
state programs and 2004 for private programs. Before those dates, earnings
withdrawn to pay college expenses are taxable income to beneficiaries. Withdrawn
earnings that are not used toward qualified expenses (e.g., the beneficiary does not
attend college) are taxable to the distributee (e.g., account owner) and are subject to
a penalty. Account owners can escape the tax and penalty if they designate a new
beneficiary who is related to the original beneficiary. Although neither account
owners nor beneficiaries were allowed to direct the investment of QTP contributions
and earnings, that restriction — considered a major drawback of the plans — was
loosened recently. QTP contributors, rather than beneficiaries, maintain control over
the invested funds. Nonetheless, payments to the plans are considered completed
gifts, which generally are removed from the contributor’s estate. In addition, a special
gifting provision allows a contributor to make 5 years worth of tax-free gifts in 1 year
to a QTP beneficiary.
Saving for college, through Section 529 plans or other vehicles, may adversely
affect eligibility for federal student aid. This is unlikely to affect the decision of higher
income families to use QTPs because their offspring are less likely than those of other
families to qualify for aid. The lack of income limits on QTP contributors combined
with the greater propensity of higher income families to save, their higher marginal
income tax rates, and the estate/gift tax treatment of QTP contributions increase the
likelihood that wealthy families will be relatively frequent users of Section 529 plans.

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Contents
An Overview of Section 529 Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
What Is a QTP? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Tax Treatment of QTP Contributions and Earnings . . . . . . . . . . . . . . . . . . 4
Qualified Earnings Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Non-Qualified Earnings Distributions . . . . . . . . . . . . . . . . . . . . . . . . . 5
Investment Control and the Tax Consequences of Transferring Funds
Between Section 529 Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Changing Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Same-Beneficiary Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Coordination of Contributions with Estate, Gift, and
Generation-Skipping Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 7
Interaction with Other Higher Education Tax Incentives . . . . . . . . . . . . . . 8
The Relationship Between QTPs and Student Financial Aid . . . . . . . . . . . . . . . . 9
Closing Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Tables
Appendix Table 1. Comparison of State-Sponsored
Prepaid Tuition Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Appendix Table 2. Comparison of State-Sponsored
College Savings Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

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Saving for College Through 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 reportedly
heightened skill levels 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 been rising to a greater extent
than family income. The average cost to students of tuition and fees between the
1989-1990 and 2001-2002 academic years increased by 8% per year at 4-year private
colleges, by 10% per year at 4-year public colleges, and by 9% per year at 2-year
public colleges.2 In contrast, average family income rose by 5% annually between
1989 and 2000, according to data from the U.S. Bureau of the Census.
In response to these trends, Congress has enacted a panoply of tax benefits
meant to encourage human capital development by increasing the affordability of
postsecondary school attendance. Among the tax incentives to promote higher
education initiated or amended by such legislation as the Technical and Miscellaneous
Revenue Act of 1988 (P.L. 100-647), the Taxpayer Relief Act of 1997 (P.L. 105-34)
and the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16)
is the qualified tuition program (QTP) or Section 529 plan, named for its section in
the Internal Revenue Code.
This report provides an overview of Section 529 provisions. It includes a
discussion of the interaction of QTPs with other tax incentives for postsecondary
education and with financial aid for students.3 The relationship between tax-based
measures to make higher education more affordable and the traditional student aid
system could well be considered during reauthorization of the Higher Education Act
in the next Congress.
1See, for example, CRS Report 97-764, The Skill (Education) Distribution of Jobs: How Is
It Changing?, by Linda Levine.
2The College Board. Trends in College Pricing 2001.
3Information on other tax benefits available to persons pursuing education beyond K-12 can
be found in the following products: CRS Report RL31129, Higher Education Tax Credits
and Deduction: An Overview of the Benefits and Their Relationship to Traditional Student
Aid, by James Stedman and Adam Stoll; and CRS Report 97-915, Tax Benefits for Education
in the Taxpayer Relief Act of 1997: New Legislative Developments; CRS Report 97-243,
Employer Education Assistance: Overview of Tax Status in 2001; and CRS Report 89-570,
Education Savings Bonds: Eligibility for Tax Exclusion, all by Bob Lyke.

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An Overview of Section 529 Provisions
A few states sponsored QTPs several years before the Small Business Job
Protection Act of 1996 (P.L. 104-188) clarified their federal tax treatment at Section
529 in the Internal Revenue Code. Most recently, the tax-advantaged college savings
vehicle was substantially amended by the Economic Growth and Tax Relief
Reconciliation Act of 2001 (P.L. 107-16). In order to comply with the Congressional
Budget Act of 1974, however, P.L. 107-16's amendments to Section 529 and many
other provisions in the Code sunset for tax years beginning after December 31, 2010.
The sunset provision introduces an element of uncertainty for individuals considering
whether to contribute to a QTP on behalf of persons who will be attending
postsecondary institutions in 2011 or thereafter. Absent congressional action, Section
529 will revert to its pre-P.L. 107-16 version in tax years starting on or after January
1, 2011. For this reason, the following overview of Section 529 covers its pre- and
post-P.L. 107-16 provisions.
What Is a QTP?
States, their agencies or 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
One type of QTP is commonly known as a prepaid tuition plan. It enables a
contributor (e.g., parent, grandparent, and interested non-relative) to make lump-sum
or periodic cash payments6 for a specified number of academic periods or course units
at current prices. Prepaid tuition programs thus provide a hedge against tuition
4Eligible 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.
5QHEEs 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 December 31, 2001.
6For both types of Section 529 plans, payments cannot be made in the form of securities or
other property.

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CRS-3
inflation in the approximately 22 states that sponsor them.7 If the beneficiary of a
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 investments, fees charged, state guarantee of rate of return and principal,
and refund policy). (See Appendix Table 1 for a summary of some prepaid tuition
programs by state.)
The other type of QTP is commonly known as a college savings plan.
Generally, the beneficiary can use funds in this newer option toward the full range of
QHEEs at any eligible institution regardless of which state sponsors the plan or where
the contributor resides. In part for these reasons, college savings programs have
become more popular than prepaid tuition plans with about 46 states offering them.8
It also has been suggested that state officials regard college savings plans as a way to
offer people a benefit with little cost to the state. In contrast, if a state guarantees its
prepaid tuition plan, it assumes the risk that earnings on the plan’s pooled
contributions will not match tuition inflation, in which case, the state must use other
resources to satisfy the plan’s obligations.9 From the contributors’ perspective, some
of the popularity of college savings plans may result from the possibility of greater
returns than produced by the usually conservative investment strategy of prepaid
tuition programs. Mutual fund companies typically manage college savings plans for
states, and each state’s plan generally offers more than one investment option (e.g.,
a portfolio of stocks and bonds whose percent composition changes automatically as
the beneficiary ages, a portfolio with fixed shares of stocks and bonds, or with a
guaranteed minimum rate of return). As the value of each savings account is based
on the performance of the particular investment strategy chosen by the contributor,
however, college savings plans could prove more risky than prepaid tuition plans.
Indeed, the depressed value of some college savings accounts in 2001 — a likely
reflection of losses in the stock market — could partly explain the greater number of
families who established prepaid tuition plans in the first half of 2001 compared to all
of 2000.10 (See Appendix Table 2 for a summary of some college savings programs
by state.)
The two types of QTPs have some common elements. A contributor may
establish multiple accounts for the same beneficiary in different states, but the
contributor cannot participate in a state-sponsored QTP if he/she sets up a prepaid
7Bell, Julie Davis and Demaree K. Michelau. Making College Affordable. State
Legislatures, October 1, 2001. (Hereafter cited as Bell and Michelau, Making College
Affordable.)
8Bell and Michelau, Making College Affordable.
9Roth, Andrew P. Who Benefits from States’ College-Savings Plans? Chronicle of Higher
Education, January 1, 2001. (Hereafter cited as Roth, Who Benefits from States’ College-
Savings Plans?)
10Dugas, Christine. Market Woes Boost Prepaid Plans. USA Today, November 6, 2001.

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tuition program with an eligible private institution (see following paragraph). A
student or potential student also may be a designated beneficiary of multiple accounts
(e.g., one originated by a parent and another by a grandparent). In addition, states
may establish restrictions that are not mandated either by Section 529 of the Code or
the proposed regulations issued in 1998. There generally are no income caps on
contributors, unlike the limits that apply to taxpayers who want to claim the higher
education tax deduction or Hope Scholarship and Lifetime Learning tax credits, or
who want to use education individual retirement accounts (now called Coverdell
education savings accounts). The absence of an income limit on contributors likely
makes Section 529 plans particularly attractive to higher income families, who also
are likely to make above-average use of the savings plans because persons with more
income have a greater propensity to save.
Effective for tax years beginning after December 31, 2001 and before January
1, 2011, P.L. 107-16 declared that one or more eligible higher education institutions
— including private institutions — may establish and maintain prepaid tuition
programs accorded the same federal tax treatment as state-sponsored prepaid tuition
plans. At this point in time, states remain the sole tax-exempt sponsors of college
savings plans.
More than 200 private colleges have said they will initiate a national prepaid
tuition program. Members of the Tuition Plan Consortium reportedly range from Ivy
League schools to large private institutions to small liberal arts colleges. Contributors
will be able to buy “tuition shares” for use at any member school regardless of its
location.11 Some believe the expansion of Section 529 plans to include private
institutions might help the schools recruit students who would otherwise have been
deterred from attending due to their comparatively high tuition. It also has been
suggested that the plans of private institutions might appeal to alumni who could
“boast they’ve not only enrolled their [offspring] in their alma mater at birth, [but]
they’ve already paid the tuition.”12
Tax Treatment of QTP Contributions and Earnings
There is no federal income tax deduction for contributions to QTPs. As of early
2001, about 17 states allow residents who participate in their own state’s plan to
claim a partial or total state income tax deduction on contributions.13
Earnings on contributions to Section 529 plans accumulate tax-deferred until
withdrawn. The deferral confers greater benefits on families with relatively high
11Schmidt, Peter. Bush Tax Cut Gives New Clout to States’ College-Savings Plans. The
Chronicle of Higher Education, June 22, 2001. (Hereafter cited as Schmidt, Bush Tax Cut
Gives New Clout to States’ College-Savings Plans.)
12Wuorio, Jeff. Prepaying Tuition Offers Peace of Mind at a Price. Available at
[http://moneycentral.msn.com/articles/family/college/1462.asp].
13Cropper, Carol Marie, and Anne Tergesen. College Savings Plans Come of Age. Business
Week, March 12, 2001. (Hereafter cited as Cropper and Tergesen, College Savings Plans
Come of Age.)

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incomes because of their higher marginal tax rates. Simulations that compared
potential after-tax accumulations in a college savings plan to those in mutual funds
employing the same asset allocation strategies generally found that the higher a
household’s tax bracket, the greater the advantage of saving through a Section 529
plan.14 The study concluded that other factors substantially affect the level of
accumulations as well. These factors are the investment expenses that alternative
savings vehicles charge and the value of a state income tax deduction, if any, on
contributions to a QTP.
Qualified Earnings Distributions. Earnings withdrawn from Section 529
plans to pay QHEEs are free from federal income tax effective in tax years starting
after December 31, 2001 for state-sponsored programs, and starting after December
31, 2003 for programs of private institutions. Until then, QTP beneficiaries continue
to pay federal income tax based on annuity taxation rules (Section 72 of the Code) for
distributions of qualified earnings; the practice confers a considerable tax benefit on
families in which the student’s tax bracket (typically 15%) is much lower than the
parents’ tax bracket. The federal tax-exempt status of earnings withdrawals makes
Section 529 plans an even more attractive means of saving for higher education
expenses: for example, a student would pay nothing instead of incurring an $18,000
federal tax bill on $120,000 in earnings from contributions of $80,000 to a QTP made
since the child was 8 years old.15 The tax-exemption might especially benefit older
students who have relatively high incomes (e.g., a beneficiary employed full-time, or
with a spouse employed full-time, who is pursuing an advanced degree or who is
taking courses to update the skills used in his/her current occupation or to learn new
skills in order to change occupations).
As of early 2001, about 26 states provided residents a tax break on earnings
distributions from their state’s Section 529 plans used to pay an in-state eligible
institution’s QHEEs. Some have speculated that the new federal tax exemption could
spur additional states to do the same for their residents. Only a few states extend the
tax exemption on qualified earnings to residents that invest in other states’ QTPs.16
Non-Qualified Earnings Distributions. Plans must impose a “more than
de minimis penalty” on the earnings portion of distributions that exceed or are not
used for QHEEs (e.g., the beneficiary does not attend college). Effective for tax years
beginning after December 31, 2003, withdrawals of excess earnings continue to be
taxable income to the distributee (e.g., account owner) and subject to an additional
14Davenport, Keith R., with Douglas Fore, and Jennifer Ma. Miracle Growth? Investment
Advisor, September 2001.
15Hurley, Joseph F. Planning Strategies Under the Education Provisions of the New Tax Act.
Journal of Financial Planning, September 2001.
16Cropper and Tergesen, College Savings Plans Come of Age.

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CRS-6
tax of 10%, absent certain circumstances.17 The 10% tax penalty is the same as that
which applies to Coverdell education savings accounts.
After the additional 10% tax penalty goes into effect, plans still may collect for
themselves the penalty that prior federal law required. However, some observers have
commented that the modest revenue the penalties have afforded states is outweighed
by their administrative burden. In addition, the practice would create a competitive
disadvantage unless all states continued it.
Investment Control and the Tax Consequences of Transferring
Funds Between Section 529 Plans
Neither account owners nor beneficiaries have been allowed to direct the
investment of contributions to, or associated earnings from, a Section 529 plan.
According to the proposed regulations published on August 24, 1998 in the Federal
Register (63 F.R. 45019), contributors are permitted — at the time they establish an
account — to choose between a prepaid tuition and a college savings program, and
if they select the latter, to choose among its investment options. The restriction on
investment control had been considered a major drawback of QTPs, but it recently
was significantly loosened.
On September 7, 2001 (Cumulative Bulletin Notice 2001-55), the Internal
Revenue Service issued a special rule that provides considerably more control to
owners of college savings accounts. Effective immediately, a college savings program
can permit current contributors to move balances — without incurring taxes and
without changing beneficiaries — from one investment strategy to another within the
state’s offerings (e.g., into a less aggressive portfolio if market circumstances have
significantly worsened over time) once per calendar year. Account owners also can,
on a tax-free basis, move balances among a state’s investment offerings if they change
beneficiaries (e.g., into a more aggressive portfolio if the new beneficiary’s
matriculation date is later than the original beneficiary’s).
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;
17The 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).

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CRS-7
(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.”18
Same-Beneficiary Rollovers. P.L. 107-16 permits tax-free transfers from
one QTP to another for the same beneficiary once in any 12-month period effective
in tax years starting after December 31, 2001. The report accompanying the
legislation provided examples of the amendment’s intended purpose: the same-
beneficiary rollover permits contributors to make tax-free transfers between a prepaid
tuition plan and a college savings plan offered by the same state, and between a state
and a private prepaid tuition plan.
Perhaps more importantly according to some observers, the amendment provides
an account owner with the opportunity for greater control over the investment of
his/her funds without changing beneficiaries. An account owner could, for example,
make a same-beneficiary rollover into the program of another state with an investment
strategy the contributor prefers to those offered by the original state’s program.19
Coordination of Contributions with Estate, Gift,
and Generation-Skipping Transfer Taxes
Contributors to Section 529 plans — rather than beneficiaries — maintain
control over the accounts. In other words, contributors can change the beneficiary
or have the plan balance refunded to them. This feature has been touted as a
significant advantage of saving for college through a QTP as opposed to a custodial
account opened under the Uniform Gifts to Minors Act (UGMA), for example. The
custodial account actually is owned by the child who, upon gaining control of the
funds, can use them for whatever purpose they chose.20
18AuWerter, Stephanie. The 529 Basics. SmartMoney.com, June 8, 2001. Available at
[http://www.smartmoney.com/consumer/index.cfm?Story=200106083].
19See, for example, Davis, Kristin. Miracle Grow. Kiplinger’s Personal Finance, September
2001, and [http://www.savingforcollege.com].
20About 32 states allow parents to fund QTPs with money from custodial accounts.
“Custodial” 529 plans retain some features of UGMA accounts, and there are tax
consequences to funding QTPs in this manner. For more information see: Wang, Penelope.
Education: Yes, There’s Still College. Money, December 2001. (Hereafter cited as Wang,
Education: Yes, There’s Still College.)

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Nonetheless, the Taxpayer Relief Act of 1997 (P.L. 105-34) declared that
payments to Section 529 plans made after August 1997 are completed gifts of present
interest from the contributor to the beneficiary. As a result, an individual can
contribute up to $10,000 annually (subject to indexation) as a tax-free gift per QTP
beneficiary.
A special gifting provision for contributions to Section 529 plans could make
them of interest to individuals with substantial resources and to families with children
who will be attending college in the not-too-distant future. QTP contributors may
make an excludable gift of up to $50,000 in a single year by treating the payment as
if it were made over 5 years. Thus, for example, each grandparent could contribute
$50,000 (for a total of $100,000) to each grandchild’s QTP in tax year 1999, which
potentially would allow more earnings to accumulate than if each had contributed
$10,000 annually from 1999 to 2003. In this instance, the two grandparents could not
make another excludable gift to those account beneficiaries until 2004.
By making QTP contributions completed gifts, the Taxpayer Relief Act also
generally removed the value of the payments from the contributor’s taxable estate.
An exception occurs, however, if a contributor who selected the 5-year advance
exclusion option dies within the period.
Interaction with Other Higher Education Tax Incentives
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, 2001.21 For the 2001 tax year, then, same-year contributions to a QTP
and Coverdell account on behalf of the same beneficiary in the same year it will be
considered an excess payment to the latter, and therefore, subject to income tax and
a penalty.
P.L. 107-16 also allows Hope Scholarship and Lifetime Learning credits to be
claimed in the same year that tax-free distributions are made from a Section 529 plan
or a Coverdell account, provided that the distributions are not used toward the same
QHEEs for which the credits are claimed. If distributions are taken from a Section
529 plan and a Coverdell account on behalf of the same student, the Act further
requires that QHEEs remaining after reduction for the education tax credits must be
allocated between the two savings vehicles. These provisions are effective for tax
years beginning after December 31, 2001. Withdrawals from QTPs before that date
still can be used to pay for the same expenses for which Hope Scholarship or Lifetime
Learning credits are claimed, but also under prior law, those withdrawals are taxable
to the beneficiary.
P.L. 107-16 initiated an above-the-line income tax deduction for QHEEs,
effective in tax years starting after December 31, 2001 and ending before January 1,
2006. The deduction cannot be taken for qualified expenses paid with tax-free
21Same-year contributions to a QTP and a Coverdell account for the same beneficiary could
have gift-tax consequences if the payment to the two savings vehicles exceeds $10,000 in 1
year or $50,000 if the 5-year option is chosen.

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withdrawals from a Section 529 program, Coverdell account, or certain U.S. savings
bonds.
The Relationship Between QTPs and
Student Financial Aid
Saving for college, through a Section 529 plan or other vehicle, may adversely
affect eligibility for and the amount of need-based student financial aid. The degree
to which this occurs depends on the type of QTP and on a family’s financial
resources.
The “federal need analysis system” defines a student’s financial need for federal
student aid programs (other than Pell Grants) to be the gap between a school’s cost
of attendance (COA) and the student’s expected family contribution (EFC) plus other
estimated financial assistance.22 A statutory formula determines the EFC based on
data submitted by students to the U.S. Department of Education on the Free
Application for Federal Student Aid (FAFSA).
As prescribed by Section 480(j) of the Higher Education Act (as revised by the
Higher Education Amendments of 1992), the Department’s formula treats qualified
distributions from prepaid tuition plans (both contributions and earnings) as reducing
the student’s COA on a dollar-for-dollar basis. The sharp reduction in the student’s
COA — and therefore in financial need — occurs regardless of who is the account
owner (e.g., a parent, aunt or non-relative).
The Department has more latitude regarding the treatment of college savings
plans in financial need analysis. It decided that, because the account owner can
change the beneficiary or close the account at will, this type of Section 529 plan is an
asset of the parent. As the Department’s formula counts a maximum of 5.6% of the
account’s value toward the EFC, the treatment is much more favorable to the student
than is the case with prepaid tuition plans.
For beneficiaries of college savings plans established by someone other than their
parents, the value of the accounts is not reported on the FAFSA, and thus, does not
raise the EFC. The exclusion of these assets from financial need analysis may “make
eligible for student aid those who by definition are more affluent than others because
they have more money to invest.”23 In other words, students in lower income families
may be doubly disadvantaged: their families could not afford to take much, if any,
advantage of QTPs; they could receive less traditional financial aid because more
affluent students have become eligible for some type of assistance.
22The COA includes such items as tuition and fees, room and board, books, supplies, and
living expenses. The EFC is the sum that a family can be expected to devote to higher
education expenses based on its financial situation.
23Roth, Who Benefits from States’ College-Savings Plans?

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The Department’s formula applies the same share (50%) of the student’s taxable
income toward the EFC whether he/she is the beneficiary of a prepaid tuition or
college savings plan. According to Section 529 of the Code, earnings distributions
for payment of QHEEs through December 31, 2001 are includable as taxable income
of the beneficiary (regardless of who is the account owner). The earnings distribution
thus may increase the student’s EFC and could reduce his/her financial need.
P.L. 107-16 makes qualified distributions of QTP earnings tax-free effective in
tax years starting after December 31, 2001 for plans of public institutions and after
December 31, 2003 for plans of private institutions. As students will cease having
taxable income from QTPs as of those dates, the earnings distributions might no
longer raise their EFC. However, the Department might, for example, require a
student to include qualified withdrawals as non-taxable income reported on the
FAFSA. In addition, some have speculated that as families’ accumulate large balances
in college savings accounts, the Department might reconsider counting them as
parental assets.24 If the accounts were instead to be deemed a child’s asset, for
example, a much larger share (35% versus 5.6%) would go toward the EFC, perhaps
reducing the amount of federal financial aid for which the student is eligible.
It should be kept in mind that some private postsecondary institutions use other
methodologies to determine student eligibility for non-federal student aid. These
alternatives to the Department’s formula may treat either or both types of QTPs
differently when calculating student need. Although some private postsecondary
schools attempt “to avoid penalizing students for having such accounts, ... many
colleges are moving in the opposite direction, and making sure their aid formulas
count” QTPs as resources available to students.25 In addition, while a few states do
not include balances in Section 529 plans when determining state financial aid for
students, most do.26
Closing Observations
In the last several years, numerous tax-advantaged measures have been enacted
to make it easier for individuals to pursue postsecondary education. Some of these
benefits are intended to encourage taxpayers to save in advance of students attending
institutions of higher education (e.g., QTPs, Coverdell education savings accounts,
and EE savings bonds). Other tax incentives do not come into play until students
have entered postsecondary school (e.g., the higher education tax deduction, Hope
Scholarship credit and Lifetime Learning credit). The variety of higher education
provisions in the Code could make it difficult for the typical family to determine the
best tax benefit or combination of tax benefits to use. A factor that could further
complicate the decision-making process is the interaction between the various tax
incentives and eligibility for student financial aid.
24Wang, Education: Yes, There’s Still College.
25Schmidt, Bush Tax Cut Gives New Clout to States’ College-Savings Plans.
26The Big News About College Savings. Mutual Funds, June 25, 2001.

---

CRS-11
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 generally, and of prepaid
tuition plans particularly, 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 dollar-for-dollar as in the case of prepaid tuition programs, or to a
much lesser extent as in the case of college savings accounts, when considering which
type of plan to setup. In addition, the estate and gift tax treatment of Section 529
plans could make them useful as estate-planning tools for wealthy families.
Middle-income taxpayers could well have the greatest problem figuring out
whether Section 529 should be part of their college financing plan and which type of
QTP to fund. If, for example, a family suffers a reversal of fortune brought about by
extended unemployment, very high medical bills or some other unanticipated event
(e.g., birth of twins) after having established a QTP, it is more likely that a 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.
The interaction of Section 529 plans with need-based student aid also is likely
to pose more of a dilemma for middle- than high-income families. If middle-income
parents want to save via a QTP and think their child will be eligible for some
assistance, then a college savings account seemingly would be the superior option
given its comparatively less adverse treatment in the Department of Education’s
financial need analysis. Indeed, some private colleges reportedly are not immediately
starting up prepaid tuition programs because they do not feel comfortable
recommending this type of Section 529 plan to a family “if there is any chance at all
that they would be eligible for financial aid.”27 Alternatively, prepaid tuition programs
27 AuWerter, Stephanie. Prepaid Tuition Plans. SmartMoney.com, June 8, 2001. Available
(continued...)

---

CRS-12
generally are a lower risk investment than college savings accounts and as such,
prepaid plans might be a more comfortable choice for middle- compared to high-
income taxpayers.
27(...continued)
at [http://www.smartmoney.com/consumer/index.cfm?Story=20010681]. Note: As previously
discussed, private educational institutions recently were extended the right to sponsor prepaid
tuition plans. In order to “level the playing field” in financial need analysis between prepaid
tuition and college savings plans, they among others (e.g., the College Savings Plans Network
which is an affiliate of the National Association of State Treasurers) might attempt to have
Congress amend the Higher Education Act. For more information see: Thomas, Georgie A.
A Better Way to Plan for College. State Government News, September 1, 2001.

---

CRS-13
APPENDIX

---

CRS-14
Appendix Table 1. Comparison of State-Sponsored Prepaid Tuition Programs
(as of August 1, 2001)
Date of
operation and
Value if used for
State and
enrollment
Age
Tuition
private or out-of-state
program name
period
restriction
What is covered
discount?
public institutions
Refund policy
Comments
Alabama (Prepaid
1990 (September)
Beneficiary
4 years of undergraduate
As much as 30%
Weighted average of
Only contract
$75 to enroll, benefits
Affordable
9th grade or
tuition and fees at state
for newborns
in-state tuition and fees
payments
must be used within 10
College Tuition)
younger
public institutions
refundable, less
years after the projected
$150 cancellation
college entrance date,
fee
earnings exempt from
state tax, one price fits all
Alaska (Advance
1991 (anytime)
No
Credits can be used on
No
Principal + earnings
Penalty is between
2-year waiting period,a
College Tuition
tuition, fees, books,
(usually money market
7.5% and 12.5 %
plan purchasers get full
Payment
supplies and equipment
rate)
of account value
value of the earnings,
Program)
benefits must be used
within 15 years of the
projected college
entrance date, guaranteed
tuition
Colorado
1997 (fall)
No
Units can be used
8% discount for
Average in-state tuition
Binding contract,
$50 to enroll, no
(Colorado
towards tuition, fees,
an 18-year
and fees
no refund before
residency required, 10%
Prepaid Tuition
books, supplies and
contract
the end of the term
penalty on earnings for
Fund)
equipment
non-qualified
withdrawals,b earnings
exempt from state tax
Florida (Florida
1988 (October–
11th grade or
Up to 4 years of
3% for newborns
The lesser of (1)
Only contributions
$42 to enroll, benefits
Prepaid College
January)
younger
undergraduate tuition
for a 4-year
in-state public tuition
refunded, $50 fee
must be used within 10
Program)
and fees at state public or
university plan
(2) principal + 5%
for contracts less
years of the projected
private higher
annual compound
than 2 years
college entrance date,
institutions
interest
guaranteed

---

CRS-15
Date of
operation and
Value if used for
State and
enrollment
Age
Tuition
private or out-of-state
program name
period
restriction
What is covered
discount?
public institutions
Refund policy
Comments
Illinois (College
October 1998
No
Up to nine semesters of
15% for
Average
Contributions +
$75 to enroll, earnings
Illinois!)
(October–
tuition and fees at state
newborns for a
mean-weighted in-state
2% interest
exempt from state tax, 3-
January)
public higher institutions
public university
public tuition and fees
refundable after 3
year waiting period,
plan
years, $100 fee
benefits need to be used
within 10 years of
projected college
entrance date, guaranteed
Maryland
April 1998
10th grade or
Up to 5 years of tuition
8% for newborns
Up to the average
Refundable after 3
$75 to enroll, up to
(Maryland
(November 10–
younger
and fees at state public
for a 4-year
in-state public tuition
years, refund is the
$2,500 state tax
Prepaid College
February 29)
institutions
university
and fees
lesser of (1)
deductible per year,
Trust)
contract
payments plus
qualified withdrawals
50% average
exempt from state tax,
earnings (2) lowest
benefits must be used
in-state public
within 5 years of
tuition and fees
projected college
entrance date
Massachusetts
1995 (April–
10th grade or
Certificates worth up to 4
No
Principal + annual
Certificates only
Tuition certificates
(U. Plan)
May)
younger
years of tuition and fees
compound interest
redeemable upon
exempt from state tax, no
at the highest cost
equal to consumer
maturity (between
residency required, not a
institution among 83
price index
5 and 16 years)
qualified 529 plan,
participating institutions
certificates must be
redeemed within 6 years
of maturity

---

CRS-16
Date of
operation and
Value if used for
State and
enrollment
Age
Tuition
private or out-of-state
program name
period
restriction
What is covered
discount?
public institutions
Refund policy
Comments
Michigan
1988 (December–
8th grade or
1 to 4 years of tuition and
No
Full contract: average
$200 fee, refund
$60 enrollment fee, $25
(Michigan
January)
younger for
fees in (1) any state
4-year public tuition
value for full
application fee,
Education Trust)
full benefit
public institution for full
and fees. Limited
benefit contract is
contributions state tax
contract, 10th
benefit plan or (2)
contract: lowest tuition
the average tuition
deductible, benefits must
grade or
institution whose tuition
of state public 4-year
of state public
be used within 9 years of
younger for
is not more than 105% of
institutions
4-year institutions;
projected college
limited
the weighted average
for limited
entrance
benefit
tuition of all state public
contract, it’s the
contract
4-year universities
lowest tuition of
state public 4-year
institutions
Mississippi
1997 (September-
18 years or
Up to 4 years of
13% for
Up to the average
Up to $150 fee,
$60 to enroll,
(Prepaid
November,
younger
undergraduate tuition
newborns for a
in-state tuition and fees
refund includes
contributions state tax
Affordable
newborns
and fees at state public
4-year university
contributions and
deductible, earnings
College Tuition)
anytime)
institutions
plan
interest earnings
exempt from state tax
Nevada (Prepaid
October 1998
9th grade or
Up to 4 years of tuition at
Over 20% for
Weighted average
Contributions
$60 to enroll, benefits
College Tuition
(October-
younger
state institutions
newborns
tuition and fees at
refunded, less
must be used within 10
Plan Trust Fund)
November,
in-state public
administrative fees
years of projected college
newborns
institutions
and up to $150
entrance date or the age
anytime)
cancellation fee
of 30
Ohio (Ohio
1989 (October-
No
Up to 2000 units can be
No
Full value of the units
No refund for
$10-$50 to enroll,
Prepaid Tuition
February,
purchased with each unit
beneficiary
earnings exempt from
Program)
newborns
worth 1% of the weighted
under18, refund
state tax, in-state tuition
anytime)
average tuition in state
equals 99% of the
guaranteed
public universities
current unit value
Pennsylvania
1993 (anytime)
No
Tuition credits for the
No
The lesser of: (1)
The lesser of: (1)
1-year waiting period,
(Tuition Account
chosen public institution
account value; and (2)
contributions; and
must be used within 10
Program)
actual tuition cost
(2) 90% of account
years of projected college
value
entrance date, earnings
exempt from state and
local taxes

---

CRS-17
Date of
operation and
Value if used for
State and
enrollment
Age
Tuition
private or out-of-state
program name
period
restriction
What is covered
discount?
public institutions
Refund policy
Comments
South Carolina
September 1998
10th grade or
2-year or 4-year tuition
13% for
No more than principal
Contributions less
$65 to enroll, earnings
(SC Tuition
(September–
younger
and fees at state public
newborns for a
+ program’s rate of
$75 penalty
exempt from state tax,
Prepayment
December)
institutions
4-year university
return
benefits must be used
Program)
plan
before age 30
Tennessee
1997 (fall)
No
Up to 1500 units, each
No
Weighted average
Contributions +
$50 to enroll, 2-year
(Tennessee
worth 1% of weighted
in-state tuition and fees
50% earnings
waiting period, may be
BEST)
average tuition and fees
refunded, no
used for graduate school,
at state public institutions
refund before
earnings exempt from
beneficiary is
state tax
college age
Texas (Texas
1996 (October–
11th grade or
Plans are offered for both
7% for newborns
Average tuition and
Contributions
$50 to enroll, must be
Tomorrow Fund)
February)
younger
public and private
for a 4-year
fees at in-state public
refunded, less fees.
used within 10 years of
colleges
university plan
or private institutions,
If beneficiary is
projected college
depending on the plan
under 18, interest
entrance date, public
purchased
up to 5% is also
tuition guaranteed
refunded
Virginia (Prepaid
1996 (October
9th grade or
Up to 3 years of tuition
13% for
Contributions and
Within 3 years,
$85 to enroll,
Education
1–February 1)
younger
and fees at community
newborns for a
actual earnings up to
only contributions
contributions up to
Program)
colleges and up to 5 years
4-year university
the highest(average)
refunded, less
$2,000/year state tax
at universities
plan
in-state public tuition
$100 penalty.
deductible, may be used
and fees for in-state
After that, refund
for graduate school,
private and out-of-state
includes
qualified withdrawals
institutions
contributions plus
state tax exempt, must be
(rate of return
used within 10 years after
–2%) Earnings
high school, one price fits
all, guaranteed

---

CRS-18
Date of
operation and
Value if used for
State and
enrollment
Age
Tuition
private or out-of-state
program name
period
restriction
What is covered
discount?
public institutions
Refund policy
Comments
West Virginia
October 1998
9th grade or
Up to 5 years of tuition
Nearly 20% for
Weighted average
$150 fee,
$70 to enroll,
(WV Prepaid
(October–
younger
and fees at state
newborns for a
tuition and fees at
contributions
contributions state tax
College Plan)
December)
institutions
4-year university
in-state public
refunded. If 4
deductible, not to be used
plan
institutions
years or more after
for graduate school, must
the projected
be used within 10 years
entrance date,
of projected college
refund amount is
entrance date or age 30
the value of
current tuition
Wyoming
1987-1995
—
—
—
—
—
Program suspended in
(Advanced
1995 due to low
Payment for
enrollment
Higher
Education)
Source: Reprinted from [http://www.tiaa-crefinstitute.org/Data/statistics/pdfs/jma_prepaid.pdf], which relied on information contained in the web site [http://www.collegesavings.org],
various states’ web sites, the May 2001 issue of Money Magazine, and the book The Best Way to Save for College, by Joseph Hurley.
Note: In addition, several states (Iowa, Utah, Kentucky) have endowment funds the earnings of which will be provided to accounts for qualified higher education expenses.
a “Waiting period” is defined as the amount of time an account needs to be open before qualified withdrawals can be made without penalty.
b Currently, earnings of qualified withdrawals are subject to federal income tax at the beneficiary’s rate. Starting January 1, 2002, earnings of qualified withdrawals will be exempt from
federal income tax. According to the current law, nonqualified withdrawals are subject to a penalty no less than 10% of the earnings portion of the withdrawal. Unless noted, a 10% penalty
on earnings is imposed on non-qualified withdrawals. Any penalty is paid into the program. Starting January 1, 2002, the penalty on non-qualified withdrawals will be replaced by an
additional 10% tax on the earnings portion.

---

CRS-19
Appendix Table 2. Comparison of State-Sponsored College Savings Programs
(as of August 1, 2001)
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
Alaska
University of
1991,
Option 1 (enrollment-based): Eight
$250,000
$30 + 1.05%
State has no
No expense charges
Alaska
revised
portfolios shift away from equities and
income tax
for Option 3. $30
College
May 2001
towards fixed income and cash over time.
annual fee waived
Savings Plan
Investors may choose any age-banded
for accounts with
portfolio. Option 2 (static portfolios):
automatic payments
100% equities; 100% fixed-income; or 60%
or a combined
equities + 40% bonds. Option 3 (advanced
balance of at least
college tuition portfolio): prepaid plan for
$25,000 for the same
University of Alaska.
beneficiary.
Arizona
Arizona
June 1999
Option 1: CollegeSure CDs with at least 4%
$168,000
No fee for
Earnings state
Maturity of
Family
return and FDIC insured up to $100,000.
Option 1. For
income tax exempt
CollegeSure CDs
College
Option 2: 100% equities. Option 3: 75%
others, $10 to
ranges from 1 to 25
Savings
equities + 25% fixed income. Option 4:
enroll, 1.42%
years. CDs must be
Program
100% fixed income.
annual fee
withdrawn within 30
years.
Arkansas
GIFT College
December
Option 1(age-tailored): 90% equities+10%
$175,000
$25 + 1.8%
Earnings state
$25 annual fee
Investing Plan
1999
bonds for youngest, 10% equities + 25%
income tax exempt
waived for state
bonds + 65% money market for 19 and older.
residents and
Option 2 (risk-adjusted): investors choose
accounts with a
among four
balance of at least
portfolios.
$25,000.

---

CRS-20
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
California
Golden State
October
Option 1 (age-based): 80% equities + 20%
$165,886
0.80%
No
1-year waiting
Scholar-Share
1999
bonds for youngest, 15% equities + 35%
perioda. Benefits
Trust
bonds + 50% money market for 17 and older.
must be paid out 10
Option 2: 100% equities. Option 3: 100%
years after a
Social Choice equities. Option 4:
beneficiary turns 35.
guaranteed with at least 3% return.
If a beneficiary is
over 35
when designated,
then
payments within 10
years.
Colorado
Scholars
October
Option 1 (age-based): 80% equities + 20%
$150,000
$30 + 1.29%
All contributions
$30 annual fee
Choice
1999
bonds for youngest, 10% equities + 60%
(contribution
state tax
waived for state
bonds + 30% money market for 19 and older.
limit)
deductible.
residents. Option 2
Option 2 (years-to-enrollment-based):
Earnings state
targeted at adult
60% equities + 40% bonds if more than 10
income tax
beneficiaries.
years from enrollment, 10% equities + 60%
exempt.
bonds + 30% money market if less than 1
year from enrollment. Option 3 (balanced):
50% equities + 50% bonds. Option 4: 100%
equities. Option 5: 100% fixed income.
Connecticut
Connecticut
December
Option 1 (aged-based): 80% equities + 20%
$235,000
0.79%
Earnings state
—
Higher
1997
bonds for youngest, 20% equities + 30%
income tax exempt
Education
bonds + 50% money market for 17 and older.
Trust
Option 2 (high equity): 80% equities + 20%
fixed income. Option 3 (principal plus
interest): guaranteed with at least 3%
return.

---

CRS-21
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
Delaware
Delaware
July 1998
Option 1 (age-based): portfolios shift away
$131,480
$30 + 1.0%
No
$30 annual fee
College
from equities and towards fixed income and
waived for accounts
Investment
cash over time. Investors may choose any
with automatic
Plan
age-banded portfolio. Option 2: 100%
payments or a
equities. Option 3: 70% equities + 30%
balance of at least
bonds. Option 4: 20% equities + 40%
$25,000.
bonds + 40% money market.
Idaho
Idaho College
2001
Option 1 (age-based): 75% equities + 25%
$235,000
0.92%
Up to $4,000 per
—
Savings Plan
bonds for youngest, 10% equities + 40%
taxpayer per year
bonds + 50% money market for 17 and older.
state tax deductible
Option 2: 100% equities. Option 3:
guaranteed with at least 3% return.
Illinois
Bright Start
March
Option 1 (age-based): 90% equities + 10%
$160,000
0.99%
Earnings state
—
College
2000
bonds for youngest, 10% equities + 60%
income tax exempt
Savings Plan
bonds + 30% money market for 18 and older.
Option 2: 100% fixed income. Option 3:
100% equities.
Indiana
Indiana
1997
Option 1 (age-based): up to 100% stocks
$114,548
$10 to enroll,
Earnings state
Withdrawals must be
Family
for those under age 11, more conservative for
(contribution
$25 + 1.06%
income tax
made within 25 years
College
older beneficiaries. Option 2: investors
limit)
annual fee
exempt.
of account opening.
choose among four mutual funds.
Iowa
College
September
Option 1 (age-based): 80% stocks + 20%
$140,221
0.79%
Up to $2,112 per
Beneficiary under 18
Savings Iowa
1998
bonds for youngest, 80% bonds + 20% stocks
taxpayer per year
when account
for age 16 and older. Option 2: six
state tax
opened. Account
portfolios with 100%, 80%, 60%, 40%, 20%,
deductible.
balance must be paid
and 0% equities, respectively.
Earnings exempt
out within 30 days
from state tax.
after a beneficiary
turns 30.

---

CRS-22
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
Kansas
Learning
July 2000
Three age-based investment tracks
$127,000
$40 + 1.22%
Up to $2000 per
$40 annual fee
Quest
(aggressive, moderate, and conservative)
(contribution
taxpayer per year
reduced to $10 for
Education
available.
limit)
state tax
residents or accounts
Savings
deductible.
with a balance of at
least $100,000.
Kentucky
Education
1990
Option 1 (age-based): 75% equities + 25%
$235,000
0.80%
Earnings exempt
Either the owner or
Savings Plan
bonds for youngest, 15% equities + 35%
from state tax.
beneficiary needs to
Trust
bonds + 50% money market for 17 and older.
have “Kentucky
Option 2: 100% equities. Option 3:
ties.”
guaranteed with at least 3% return.
Louisiana
Louisiana
July 1997
Option 1 (growth option): 85% equities +
$281,543
No fee
Up to $2,400 per
Residency required,
START
15% fixed income. Option 2 (balanced
return per year
12-month waiting
option): 60% equities + 40% fixed income.
state tax
period. Up to 14%
deductible.
matching grant
Earnings state tax
available for
exempt.
accounts with at least
$100 contributions
during the year and
family income less
than $100K.
Maine
NextGen
August
Option 1 (age-based): 90% equities + 10%
$225,000
$50 + 1.85%
Earnings state
—
College
1999
bonds for youngest, 5% equities + 15% fixed
income tax
Investing Plan
income + 80% money market for 21 and
exempt.
older. Option 2: 100% equities. Option 3:
75% equities + 25% fixed income. Option 4:
100% fixed income.

---

CRS-23
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
Massachusetts
U. Fund
March
Option 1 (age-based): portfolios shift away
$171,125
$30 + 1.00%
No
$30 annual fee
1999
from equities and towards fixed income and
waived for accounts
cash over time. Investors may choose any
with automatic
age-banded portfolio. Option 2: 100%
payments or a
equities. Option 3: 70% equities + 30%
balance of at least
bonds. Option 4: 20% equities + 40%
$25,000.
bonds + 40% money market.
Michigan
Michigan
2000
Option 1 (age-based): 75% equities + 25%
$125,000
0.65%
Up to $5,000 per
One-third matching
Education
bonds for youngest, 15% equities + 35%
taxpayer per year
grant (up to $200)
Savings
bonds + 50% money market for 17 and older.
state tax
available from the
Program
Option 2: 100% equities. Option 3:
deductible.
state for new
guaranteed with at least 3% return.
Earnings state tax
accounts with a state
exempt.
resident beneficiary
who is 6 or younger,
and whose family
income is less than
$80,000.
Mississippi
Mississippi
Fall 2000
Option 1 (age-based): 80% equities + 20%
$235,000
0.92%
Earnings state tax
—
Affordable
bonds for youngest, 20% equities + 30%
exempt. Up to
College
bonds + 50% money market for 17 and older.
$10,000 per
Savings
Option 2: 100% equities. Option 3: 100%
taxpayer per year
money market.
state tax
deductible.
Missouri
MO$T
November
Option 1 (age-based): 75% equities + 25%
$235,000
0.65%
Up to $8,000 per
12-month waiting
(Missouri
1999
bonds for youngest, 10% equities + 40%
taxpayer per year
period.
Saving for
bonds + 50% money market for 17 and older.
state tax
Tuition
Option 2: 100% equities. Option 3:
deductible.
Program)
guaranteed with at least 3% return.
Earnings state tax
exempt.

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CRS-24
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
Montana
Montana
1998
CollegeSure CDs issued by College Savings
$168,000
None
Up to $3,000 per
$100 fee if
Family
Banks with at least 4% return (maturity of
(contribution
taxpayer per year
withdrawals are
Education
CDs needs to coincide with the expected
limit)
state tax
made within 3 years
Savings
years of college attendance), FDIC insured up
deductible.
of account opening.
Program
to $100,000 per account.
CDs must be
withdrawn within 30
years.
Nebraska
Nebraska
January
Option 1: four age-based portfolios that shift
$165,000
$24 + 1.0%
Up to $1,000 per
—
College
2001
away from stocks over time. Option 2: six
tax return per year
Savings Plan
target portfolios with 100%, 80%, 60%, 40%,
state tax
20%, and 0% equities, respectively.
deductible.
Earnings state tax
exempt.
New
Unique
July 1998
Option 1 (age-based): portfolios shift away
$166,600
$30 + 1.00%
No state income
$30 annual fee
Hampshire
College
from equities and towards fixed income and
tax. Earnings
waived for accounts
Investing Plan
cash over time. Investors may choose any
exempt from state
with automatic
age-banded portfolio. Option 2: 100%
interest and
payments or a
equities. Option 3: 70% equities + 30%
dividends tax.
balance of at least
bonds. Option 4: 20% equities + 40%
$25,000.
bonds + 40% money market.
New Jersey
New Jersey’s
August
Option 1 (age-based): 80% equities for the
$150,000
$5 + 0.5%
Earnings exempt
Residency required.
Better
1998
youngest, 20% equities + 80% fixed income
from state tax.
Between $500 and
Educational
for 15 and older. Option 2: 100% equities.
$1,500 scholarship
Savings Trust
Option 3: 75% equities + 25% fixed income.
for college in NJ
Option 4: 100% fixed income.
available for
accounts that have
been open for more
than 4 years and
with more than
$1,200 contributions.

---

CRS-25
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
New Mexico
Education
October
Option 1 (age-based): five portfolios that
$160,539
$30 + 1.29%
All contributions
1-year waiting
Plan of New
2000
shift away from equities and towards fixed
(contribution
state tax
period. $30 annual
Mexico
income and cash over time. Investors may
limit)
deductible.
fee waived for
choose any age-banded portfolio. Option 2:
Earnings exempt
residents, accounts
100% equities. Option 3: 100% bonds.
from state tax.
with automatic
Option 4: 100% money market.
payments or a
balance of at least
$10,000.
New York
New York’s
September
Option 1 (age-based managed allocation):
$235,000
0.65%
Up to $5,000 per
3-year waiting
College
1998
75% equities + 25% bonds for youngest, 15%
taxpayer per year
period.
Savings
equities + 40% bonds + 45% money market
state tax
Program
for 17 and older. Option 2 (aggressive
deductible.
managed allocation): similar to Option 1,
Earnings exempt
with more equities. Option 3 (high equity):
from state tax.
75% to 100% equities. Option 4
(guaranteed): guaranteed with at least 3%
return.
North Carolina
College
June 1998
Option 1 (age-based): 85% equities + 15%
$187,500
$75 to enroll,
Earnings state
Residency required,
Vision Fund
bonds for youngest, 15% equities + 25%
(contribution
0.5% annual
income tax
beneficiary less than
bonds + 60% money market for 21 and older.
limit)
fee
exempt.
11th grade when
Option 2: 100% equities. Option 3
account opened.
(guaranteed): 100% fixed income.
Benefits must be
paid out before the
beneficiary turns 30.
A 15% penalty on
earnings for
non-qualified
withdrawals.b

---

CRS-26
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
Ohio
Ohio College
Fall 2000
Option 1 (age-based): 85% equities + 15%
$229,000
1.27%
Up to $2,000 per
Residency required.
Advantage
bonds for youngest, 15% equities + 25%
tax return per year
Savings Plan
bonds + 60% money market for 21 and older.
state tax
Option 2: 60% equities + 30% bonds + 10%
deductible.
cash. Option 3: 85% equities + 15% bonds.
Earnings state tax
Option 4: 100% equities.
exempt.
Oklahoma
Oklahoma
April 2000
Option 1 (age-based): 80% equities + 20%
$235,000
0.83%
No
1-year waiting
College
bonds for youngest, 20% equities + 30%
period.
Savings Plan
bonds + 50% money market for 17 and older.
Option 2: 100% equities. Option 3:
guaranteed with at least 3% return.
Oregon
Oregon
January
Option 1 (age-based): 90% equities + 10%
$150,000
2.44%
Up to $2,000 per
Residency required.
College
2001
bonds for youngest, 10% equities + 40%
taxpayer per year
Savings Plan
bonds + 50% money market for 18 and older.
state tax
Option 2: 100% equities. Option 3: 100%
deductible.
fixed income.
Rhode Island
RI Higher
September
Option 1 (age-based): 100% equities for
$246,000
$25 + 1.25%
No
$25 annual fee
Education
1998
youngest, 25% equities + 40% bonds + 35%
waived for state
Savings Trust
money market for 19 and older. Option 2
residents, accounts
(age-based): similar to Option 1, with more
with automatic
equities. Option 3: 100% equities. Option
payments or a
4: 60% equities + 40% fixed income. Option
balance of at least
5: 100% bonds.
$25,000.
Tennessee
Tennessee
March
Age-based managed allocation: 70% equities
$100,000
0.95%
Earnings exempt
—
BEST
2000
+ 30% bonds for youngest, 5% equities +
(contribution
from state interest
Investment
40% bonds + 55% money market for 17 and
limit)
and dividends tax.
Savings
older.
Program

---

CRS-27
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
Utah
Utah
1996
Option 1: 100% money market. Option 2
$160,000
No fee for
Up to $1,365 per
100% penalty on
Educational
(age-based): 95% stocks + 5% bonds for age
(contribution
Option 1. For
beneficiary per
earnings if
Savings Plan
3 and younger, 25% stocks + 50% bonds +
limit)
other
taxpayer per year
non-qualified
Trust
25% money market for 17 and older. Option
options, up to
state tax
withdrawals are
3 (age-based): similar to Option 2, with
$25 + 0.31%
deductible.
made within 2 years
more equities. Option 4: 100% equities.
Earnings state
of account opening.
tax exempt.
Benefits need to
Account must be
begin to be paid out
opened before the
before the
beneficiary turns
beneficiary turns 22
19 for these state
years and 4 months
tax benefits.
(27 upon request).
Vermont
Vermont
December
Option 1 (interest income option): 100%
$100,000
0.80% for
Earnings exempt
“Vermont
Higher
1999
fixed-income securities. Option 2
(contribution
Option 2. No
from state tax.
connection”
Education
(age-based): 70% equities + 30% bonds for
limit)
fee for
required, 1-year
Savings Plan
youngest, 10% equities + 40% bonds + 50%
Option 1.
waiting period.
money market for 17 and older.
Virginia
Virginia
December
Option 1 (age-based portfolios): portfolios
$100,000
$85 to enroll.
Up to $2,000 per
1-year waiting
Education
1999
shift away from equities and towards fixed
(contribution
1.0% annual
account per year
period. Benefits must
Savings Trust
income and cash over time. Investors may
limit)
fee
state tax
be paid out within 10
choose any age-banded portfolio. Option 2
deductible.
years after the
(all-fixed-income portfolio): 100% fixed
Unlimited state tax
projected high school
income.
deduction for
graduation date (or,
owners 70 and
for adults, 10 years
older. Earnings
after the account is
state tax exempt.
opened).

---

CRS-28
Annual
First date
Current
expense
Name of the
of
lifetime account
charges and
State tax
State
program
operation
Investment options
balance limit
other fees
advantages
Comments
Wisconsin
EDVEST
1997
Option 1 (age-based): 90% equities + 10%
$246,000
No fee for
Up to $3,000 per
2 academic-year
Wisconsin
bonds if more than 10 years from enrollment,
tuition unit
beneficiary per
waiting period before
College
100% bonds if less than 3 years from
option.
year state tax
tuition units can be
Savings
enrollment. Investors may choose any
1.25%
deductible.
redeemed.
Program
age-banded portfolio. Option 2: (1) 100%
annual fee
Earnings state tax
index equities, (2) 100% bonds. Option 3:
for other
exempt.
(1) 90% equities + 10% bonds, (2) 70%
options.
equities + 30% bonds, (3) 50% equities +
50% bonds. Option 4 (tuition unit option):
similar to prepaid plans, funds invested in
bonds.
Wyoming
Wyoming
May 2000
Option 1 (age-tailored): 80% equities +
$120,000
$50 + 1.57%
No state income
$50 annual fee
College
20% bonds for youngest, 5% equities + 18%
(contribution
tax.
waived for state
Achievement
bonds + 77% money market for 22 and older.
limit)
residents.
Plan
Option 2: 100% equities. Option 3: 75%
equities + 25% fixed income. Option 4:
100% fixed-income.
Source: Reprinted from [http://www.tiaa-crefinstitute.org/Data/statistics/pdfs/jma_savings.plans.pdf], which relied on information contained in the web site [http://www.collegesavings.org],
various states’ web sites, the May 2001 issue of Money Magazine, and the book The Best Way to Save for College, by Joseph Hurley.
Note: In addition, several states (Iowa, Utah, Kentucky) have endowment funds the earnings of which will be provided to accounts for qualified higher education expenses.
a “Waiting period” is defined as the amount of time an account needs to be open before qualified withdrawals can be made without penalty.
b Currently, earnings of qualified withdrawals are subject to federal income tax at the beneficiary’s rate. Starting January 1, 2002, earnings of qualified withdrawals will be exempt from
federal income tax. According to the current law, nonqualified withdrawals are subject to a penalty no less than 10% of the earnings portion of the withdrawal. Unless noted, a 10% penalty
on earnings is imposed on non-qualified withdrawals. Any penalty is paid into the program. Starting January 1, 2002, the penalty on non-qualified withdrawals will be replaced by an
additional 10% tax on the earnings portion.

---