Saving for College – Part II

A while back I suggested that Qualified State Tuition Programs — QSTPs — far outshine the so-called Education IRAs . . . and that of all the state plans, the one to be sure to look at, no matter where you live, is Indiana’s. It lets you put in far more money (in excess of $100,000, versus $500 a year in an Ed-IRA) and it is open to residents of all states, regardless of income (high-earners don’t qualify for Ed-IRAs) and regardless of where your kid or grandkid (or your butler’s daughter) winds up going to college. And you don’t lose control of the money when the child reaches college age. And you have good choices on how the money is invested. And more. It appears to be a very good deal.

Mike Welsh: “I have been a participant in the Indiana College Savings Plan since the DOW was below 8,000. The fund has done almost nothing but lose in an age of widespread prosperity. ICSP has had to change vendors in this time (still without profit) and has refused to let me, as a dissatisfied client, talk at their meetings. I would very much like to reinvest elsewhere, but the fees to withdraw are prohibitive. I hope that your readers to not enter a similar trap.”

Denise Neal: “I wrote to you before and I NEVER received a reply. I am the lady who invested $15,000 in The Indiana College Savings Plan and after over two years of RECORD HIGHS in the stock market my daughter’s fund showed a measly $403 in earnings. I even entered the fund into YOUR fund analysis link and it told me to DUMP it! Listen to me, Andy!! I went to a ‘simple’ Purdue ‘extension’ to study ‘Nursing’ … I certainly didn’t study ‘high finance’ at Harvard and even I can tell you that The Indiana College Savings Plan is nothing I would recommend to ANYONE! And to think when I called downstate they sent me a copy of your column and told me I would LOSE 10% if I chose to withdraw the money!!! I want to know just HOW I am supposed to pay for my daughters college with such paltry returns???”

Well, yes. At the time Mike and Denise went into the plan, it was rotten, and certainly not recommended here. It was, in the words of my QSTP expert Less Antman, “an absolute piece of garbage.”

But that was then. In March of 1999, their lousy investment adviser was replaced. They added an index fund option and, in June, significantly reduced their fees. I would not have advised someone to invest in the Indiana plan that existed prior to June 1999.

We can all agree that the State of Indiana should have been ashamed of itself for the plan it used to have. In fact, I guess it was ashamed of itself — and so made radical changes. (Utah also had a terrible plan until very recently.) So now it’s a different story.

As for the 10% penalty Denise refers to, it is not some Indiana cruelty, but a federal penalty for early withdrawal form such plans. And it is levied on the earnings only, so it would be $40 (10% of $403) plus, I think, a small processing fee, rather than something huge.

But I wouldn’t advise withdrawing the money now that the plan’s been fixed.

UTAH VERSUS INDIANA

Meanwhile, another of you wrote in to say that Utah’s plan was actually better than Indiana’s. Lower expenses, for one thing.

Well, Utah’s plan is good, too, and worth a look. But for now, we’ll stick with Indiana. (You can find information on all these plans at savingforcollege.com.)

(1) The annual administrative fee in Indiana is 0.5%. In Utah, only 0.25% — but with an additional $25. For small savers, that extra $25 can actually make Utah more expensive. Only once they have more than $10,000 in the plan will Indiana’s costs begin to exceed Utah’s. And Utah’s plan specifically reserves the right to raise it’s annual fee to 0.5% plus an additional $50 at any time. Indiana has committed to its current fee structure.

(2) Utah’s Vanguard Index Fund, at 0.06%, is clearly lower in cost than Indiana’s One Group Index Fund 0.36%. Indiana recently added a Vanguard bond fund to its list of choices, and might very well add more in the near future, but at the moment, this clearly is in Utah’s favor.

(3) Indiana permits $30,000 more to be sheltered.

(4) Utah requires the beneficiary to be 16 or younger when the plan is opened, while Indiana has no age restriction. Utah effectively requires the distribution of funds to start before the beneficiary reaches age 27, while Indiana will wait 17 more years (if I remember right). Indiana’s approach would allow a couple to start saving before the kids are born, by naming each other as beneficiaries and then rolling the plans over to the children, once they are born. A person may even be able to name himself beneficiary in the Indiana plan, while it is directly prohibited in the case of Utah.

(5) Utah forbids the rollover of funds to another beneficiary once the original beneficiary enrolls in college (even then, the substituted beneficiary must be 16 or younger), so any leftover income following graduation will be penalized and the remainder taxed to the owner of the plan. You have to make absolutely sure you don’t save too much. Indiana allows rollover of any remaining funds following graduation to another beneficiary. Anyone who might want to help more than one child go to college and who isn’t capable of precisely determining the cost of college for each one will appreciate Indiana’s flexibility.

(6) It isn’t fair to criticize Indiana’s more expensive investment alternatives, since Utah allows no choice among stock market mutual funds. With Utah, it’s an S&P 500 Index Fund — period. Small cap and international investing are more expensive, and Indiana should not be punished in a comparison with Utah for offering a unique fund-of-funds approach with a globally diversified portfolio. Someone who thinks that a portfolio exclusively invested in large U.S. stocks today might be dangerous will appreciate Indiana’s fund-of-funds choice.

So Utah’s plan is excellent compared with other states, but Indiana’s, for many people, seems better still. Don’t forget, you can find information on all of these plans at savingforcollege.com.

[See March 13, 2000 update: Indiana downgraded for poor customer service, administrative errors.]

Tomorrow: Explosive Cooking News