ADVISERS AREN’T BEATING DOWN DOORS OF STATE PREPAID TUITION SAVINGS PLANS: 34 STATES OFFER THEM, BUT BETTER WAYS SEEN

State-sponsored college savings plans, which started more than a decade ago, have blossomed across the country, but financial advisers still aren’t wowed by them.

Thirty-four states, up from nine in 1995, now offer versions of such plans. Advisers acknowledge most of these plans can at least get procrastinators started early. For the most part, though, the states’ programs offer risks without more advantages than the basic stock mutual fund.

It’s difficult to quantify how much is actually invested in state plans, but they seem to be gaining in popularity as more states introduce them. Parents invest over a period of years in a fund set up by the state. They pay at current tuition rates, and the state invests the money, so that it can pay the tuition at future rates.

state-by-state variety

Details differ. Some states allow parents to decide on their monthly installment payments. Others calculate the payments for them based on the per-unit cost of degrees.

In general, financial advisers believe clients would do better by investing in a mutual fund and dedicating its returns to college costs.

After all, the average domestic growth fund had a five-year average annualized return of 18.4% by the end of 1998. Finding a college plan to match that growth would be as easy as growing hair on a billiard ball. Even if you believe the market will slow to a more normal rate of return of 8% or 10%, you probably won’t find a state college plan that will do better.

Moreover, college tuition increases have been slowing to an annual 4% to 5%, compared with 8% to 9% in past years, according to the College Board in New York.

“I’d be the first to say there are some disadvantages to these plans,” says Mari Adam, an adviser in Fort Lauderdale, Fla., “but I would heartily recommend them to most parents.”

She believes a state-sponsored plan provides an incentive to invest for a far-away goal. Many parents think they have a plan to pay tuition costs, she says, but eventually end up in debt they could have avoided.

She often puts parents’ money into mutual funds, but for those who can’t afford much stock market risk she has started a number of clients on Florida’s plan, which allows them to pay toward a four-year degree for as little as $53 a month over five years.

Yet she does have problems with the state programs. One is that many states pay back only a small amount of the investment earnings, or none at all, if the child decides not to go to college. “That’s the big risk,” Ms. Adam says. “But given the type of client we’re dealing with, that’s highly unlikely. Most kids today want to go to college.”

Still, asks Tama McAleese, an adviser with Cornerstone Consultants in suburban Cleveland, “What if you’ve raised Rambo?” She never recommends state-sponsored programs because of the risk that a kid won’t go to college. Plus, she has other problems with them.

too much vs. too little risk

Florida’s plan, for instance, invests in bonds, which earn abysmal returns compared to the stock market. Other state plans invest in stocks and thus may be too risky, she says. But primarily, state-sponsored tuition savings plans stick in her throat because they all require parents to abdicate control over their own investments to state government.

“Here are my rules,” says Ms. McAleese, who is also the author of “Get Rich Slow”: “Get control of the money and monitor it. And make sure you have some kind of fire escape out.”

She advises clients to ignore state-sponsored plans and invest for college in a mutual fund under the Uniform Gift to Minors Act. These accounts provide immediate tax breaks, and allow parents to invest however they want.

Plus, who wants to rely on a state government’s commitment? “If the whole thing ends up defaulting, who takes the risk?” she asks.

Indeed, Michigan pioneered the prepaid tuition plan in 1988, then suspended its plan for several years in a dispute with the Internal Revenue Service.

It has now reinstated it on a limited basis, but the plan has suffered from low earnings and other problems, say advisers.