A college savings plan that is not pegged to future tuition costs, but rather invested according to asset allocation strategies determined by the individual states. This newer type of plan is likely to produce a better return for the long-term investor than prepaid tuition plans, because college costs have only been rising at about 4 percent annually in recent years. About half of the more than 40 states that offer QSTPs have no residency requirements for contributors or beneficiaries. Some states even offer their residents some state tax advantages.
Most colleges weight the child's assets more heavily in determining financial aid.
Anyone can set up a QSTP for a prospective student. That can be especially useful for grandparents looking to trim the size of their estate. If so utilized, the grandparent's annual gift tax exclusion would be exhausted for the current year and the next four years. Naturally, QSTPs come with restrictions, perhaps the biggest of which is that all the money in the account must be applied toward college in order to receive favorable tax treatment. Thus, taxes on earnings can't be paid from the account without incurring penalties and additional taxes.