College-Bond Plans Grow Amid Doubts Over Tuition Guarantees

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States' interest in offering tax-free college-savings bonds is growing, but the outlook appears uncertain for tuition "trust fund" plans like the one pioneered by Michigan, a new study indicates.

According to the report by the Education Commission of the States, 12 states--Colorado, Connecticut, Delaware, Illinois, Iowa, Kentucky, Missouri, North Carolina, North Dakota, Rhode Island, Virginia, and Washington--have authorized the sale of such bonds as a way of helping parents save for their children's college education. Illinois, North Carolina, North Dakota, and Washington have already begun issuing the bonds, and Connecticut plans its first sale in December.

In contrast, the study found, only seven states have adopted programs similar to the one in Michigan, which allows parents to invest in a state trust fund in exchange for guaranteed payment of their children's college education, regardless of future costs. The states are Florida, Indiana, Maine, Missouri, Oklahoma, Tennessee, and Wyoming.

Several of those states have de8layed implementing their plans pending further clarification of the Michigan program's tax status by the Internal Revenue Service.

Last spring, the irs ruled that while parents' contributions to the Michigan Education Trust would be exempt from taxes, students would be taxed at the time of payout on the interest earned. The state also has asked the federal tax agency to rule on whether the trust itself will be exempt from federal taxation.

"Two years ago, states were jumping on the bandwagon" to develop such programs, said Jennifer Afton, a co-author of the study. "Now, there is a wait-and-see attitude."

According to the study, savings-bond proposals were under consideration this year in the Georgia, Minnesota, and Ohio legislatures, and tuition-guarantee bills in the New Jersey and Pennsylvania legislatures. A combination savings-bond and tuition-certificate bill is pending in Massachusetts.

California lawmakers, meanwhile, are considering legislation to establish a bond program and authorize a study of the tuition-guarantee concept. And nine other states are studying the issue.--mw

Vol. 08, Issue 08

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