NCPA - National Center for Policy Analysis

Rating States' College Savings Plans

January 14, 1999

A number of states started offering college savings plans -- which are designed to encourage parents to save for their children's higher education -- after a 1996 federal act allowed contributions to grow tax-deferred. When the money is used for college, the earnings are taxed based on the student's income tax bracket.

Since the plans vary from state to state, Kiplinger's Personal Finance Magazine compared and rated them in its February issue. Plans with the potential for high returns, maximum flexibility, reasonable penalties and state tax benefits earned the highest marks.

  • Plans in Iowa and New York earned an A-plus.
  • The magazine found Iowa's plan attractive because accounts can earn stock-market returns and a state tax deduction of up to $2,000 per contributor per account each year.
  • Alabama, Florida, Maryland and Michigan each received the lowest score -- a C-minus.
  • Of the 34 state tuition savings programs, 19 offer pre- paid tuition plans and 15 offer special savings accounts.

Prepaid tuition plans involve a state's promise that the amount set aside will cover tuition at a state school when the time comes. Savings accounts offer a tax break on money specifically set aside for college.

Some seven to 10 states -- along with the District of Columbia -- are expected to set up similar programs, some later this year. Savings programs are unlikely to be established in Hawaii, Idaho, Nebraska, North Dakota, South Dakota and Georgia -- which have scholarship programs for state residents.

Penalties for not using the money for college are harshest in Alabama and Florida.

Source: Mary Beth Marklein, "Iowa, New York Ace Tuition-Savings Test," USA Today, January 14, 1999.


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