At least; a dozen states now have prepaid tuition plans, and probably another dozen may pass plans during 1997. (Some states issue baccalaureate bonds, which are tax-exempt zero-coupon bonds if used to pay for in-state schools). The prepaid tuition programs are beginning to grow so much in popularity that groups of private schools are considering setting up their own prepaid tuition programs in order to compete, or are joining public school plans, such as Massachusetts' U. Plan.

While the plans vary in details, in general they work this way: the family pays into the state program a set amount of money. based on the age of the child. For example, if the child is newborn, the family might pay $6,200 for four years; if the child is five, the family might have to pay $9,300. Payments are either in a lump sum or installments. The state invests the money and guarantees that the child's four-year tuition costs will be paid for at any state public institution regardless of how much tuition rates may rise by the time the child enrolls.

Most state prepaid tuition programs allow the transfer of the principal the family pays in, plus earnings (equal to the rise in average tuition costs) should the child decide to go to a private or an out-of-state public school. Some programs allow the funds to be transferred to benefit another child in the same family. The programs also allow refunds, sometimes with or without earnings, in the event the child doesn't go to college or the parent or child dies before the child enters school.

Congress gave a boost to the prepaid programs in 1996 by clarifying several confusing tax-law issues about the programs:

• Investment earnings are tax-deferred until the student reaches college age. When the student draws on the funds (or "credits," as they're called in some programs) to pay tuition, the earnings are taxed at the student's rate, not the parent's or other contributor's rate (which is usually higher).
  
• Earnings are subject to income tax if the contributor receives a refund from the program.
  
• If the contributor dies, any contributions and earnings still in the plan are included in the contributor's estate and are subject to estate tax.

With the tax issues largely resolved, the question rises whether families should take advantage of these prepayment programs. Many Certified Financial Planner professionals suggest that families keep the following points in mind when deciding:

Disciplined investors probably can do better on their own. The return on prepayment programs is basically the inflation rate of tuition, which has been running 6-8% or higher at public schools. Alternative investments such as stocks, mutual funds or other more aggressive types of investments typically do better than that over time. On the other hand, the tax deferral benefits and the taxing of the earnings at the student's rate close the gap somewhat (particularly for higher bracket taxpayers). Prepayment programs are especially attractive to people who have a hard time saving money, invest conservatively, or are afraid to invest.

How much time is left before the student starts college also is a factor. If only a few years are left, college funds should generally be invested conservatively, such as in bonds or certificates of deposit. The investment return of a prepaid tuition program should do about as well, with the added plus of a guarantee and the tax benefits.

Financial aid is, in effect, reduced dollar for dollar by prepaid tuition. That reduces a lower-income family's chance for grants and need-based scholarships.

Doubts about whether your child will go to college also reduce the appeal of these programs. That's because many plans only return your contributions, with no interest, if the child doesn't go to school. If doubts exist, it would be better to invest in other assets whose earnings wouldn't be lost should the child decide not to attend school.

Restrictions include the fact that the contributor cannot direct the investment, cannot overfund the investment, and cannot use the investment in the plan as security for a loan.

These programs cover only "qualified higher education expenses." Don't make the mistake of thinking these programs will pay for everything. Most don't cover room and board, books, fees, and the many other expenses associated with college. Furthermore, they won't pay for anywhere near all of the tuition costs should the student decide to go to a private school or out-of-state public school where tuition will run much higher than an in state public school covered by the program.

May -30- 1997