The newest state savings plans go to the head of the class. State treasurers have been busy since we last reviewed state-sponsored college savings plans. Six states will have launched brand-new savings plans by September, and two more have significantly improved their investment options. Don't worry about grade inflation. All plans grow tax-deferred until the money is used for college, and the earnings are then taxed in the student's bracket, which is usually lower than a parent's.
Some states add additional tax benefits for their residents.
Arizona's Family College Savings Program is our favorite among the new plans because it allows maximum flexibility for college savers. Most states give you no choice about when money is shifted from an aggressive blend of stocks and bonds to a more conservative mix. Since the tax rules don't allow savings plan participants to direct their own investments, you must arrange for switches when you open an account. Whichever investment you choose, earnings are exempt from Arizona state tax. Arizona's plan is open to any U.S. resident.