State and local taxes are deferred upon deposit and assessed at redemption in the child's bracket. There are usually penalties for cancellation, if a student should decide not to attend college. Prepaid tuition is a guarantee. That's the good news. The bad news is that such programs are extremely conservative investments, especially when the stock market is going like gangbusters.
Most investors can do better there, tax benefits or no.
Furthermore, college tuition increases have moderated to the 5-6 percent range and may fall even lower. With the addition of new federal tax breaks, prepayment is looking less attractive than two or three years ago, when the programs were conceived. The recent tax news notwithstanding, the fall's most significant development may be the pending reauthorization of the Higher Education Act. Instead, there would be a standard level of assets assumed for each level of family income. This change would help cut down on fraud and eliminate the frequent need to file aid forms based on estimated figures.