Today 42 states have plans and eight more will roll out versions within a year. About 788,500 children had college money working for them in the plans at the end of 1998. With most plans, you'll still have to pay for necessities like housing, textbooks, and late-night mozzarella sticks. Several states now have an even better idea. They are experimenting with savings plans that are like individual retirement accounts for college savings.
Participants contribute up to the limit set by the plan.
Best of all, many states don't tax the earnings, so the account can grow more quickly than regular savings. So if you are in the 30 percent tax bracket, you'd have to get a pretax rate of return of 6.38 percent to equal a plan's 5 percent return over the same 18-year period, says Bernard Kent, a tax partner at PricewaterhouseCoopers. The tax status of Iowa's plan was the hook for Karen and George Carroll of Johnston, Iowa. The couple bought the plan for their two daughters after being hit with hefty taxes on the capital gains they made from mutual funds set aside to pay for college. Many plans allow other family members or friends to contribute to the account.