Today, most states sponsor QSTP savings plans. And many state programs do not require residency to participate. QSTPs invest your contributions along with other people's contributions, mutual fund style. Earnings on QSTP savings plan accounts avoid federal income tax until they are withdrawn from the plan. The income portion of these is taxed at the child's tax rate, which is likely to be lower than the donor's.
Most states give their residents tax breaks for investing in their plans.
Generally, the income is tax free, not just deferred. Some states even permit residents to deduct contributions to QSTPs on their state tax returns. Under the ordinary tax rules, this would cause the value of the account to be taxable in the donor's estate. Under the present rules, a grandparent-owned account does not even appear as an asset on financial aid applications. In addition, some states disregard QSTP accounts in calculating a student's state financial aid.