College financing in 2006: A year of change
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Permanently extending the perks is sure to help make 529s more popular -- though not especially simpler for consumers, who have to do quite a bit of research to find the plan that's best suited to them. In fact, another trend in the 529 industry contended with the thorny issue of marketing by bankers, brokers and dealers who sell 529s to the public. (Keep in mind, however, that some plans aren't sold by these financial types, but are instead sold directly to investors.)

After much discussion and proposals, the Municipal Securities Rulemaking Board, the governing body that oversees banks, brokers and dealers who sell 529s, adopted stricter requirements on how the plans are sold. The MSRB, however, did back away from a more ambitious plan to make brokers complete an extensive analysis of all 529 plans before selling them to clients.

Instead, brokers must follow new requirements, which took effect in August, to ensure that any 529 plan they sell is suitable for a particular client.

"They can't assume that because they're marketing something that's really good, it'll be good for anyone," says Ernie Lanza, senior associate general counsel at MSRB. "They have to look at the specific needs of the customer."

And they must warn individuals that they could miss out on additional perks, such as lower fees, matching funds or additional tax benefits, if they invest in an out-of-state 529 plan. How much they give up, however, depends on numerous factors, including on where they live since state benefits vary. In Pennsylvania, individuals can claim a state tax deduction up to $12,000, and married couples can deduct up to $24,000, for stashing cash in that state's 529 plans. In New York, the limit is $5,000 per individual or $10,000 per couple. But roughly half the states offer no 529 tax deduction at all.

Such discrepancies highlight the third big trend in the 529 industry: tax parity.

"The idea with parity is extending state tax deductions to residents who contribute to any 529 plan," says Jacqueline T. Williams, chair of the College Savings Plan Network and executive director of the Ohio Tuition Trust Authority.

Pennsylvania began offering tax parity in 2006. As of 2007, Maine and Kansas will offer tax deductions to their residents regardless of which state plan they open.

When picking such a plan, you need to read a few tea leaves to determine what kind of school your children will likely attend. Will they go to a public institution or to a more expensive private university? Or will they start off at a community college? Even if life doesn't turn out as you expect ("Surprise, Mom and Dad! I got into Yale!"), you would be able to apply your prepaid plan dollars to another school, though you may have to do some last-minute hustling to make up for any shortfall.

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