Illinois improves its college saving plan

By David Nicklaus
St. Louis Post-Dispatch, St. Louis, MO
Published Friday, March 16, 2007

Illinois has used both a stick and a carrot to convince parents that they should invest in its Bright Start college savings plan. Now that State Treasurer Alexi Giannoulias has announced a new, improved version of Bright Start, Illinois should be able to drop the stick.

The carrot is a state income-tax deduction for money deposited in Bright Start. Most Illinoisans pay tax at a 3 percent rate, so the state chips in $30 for every $1,000 you save for college. Anything you earn in the account also accrues free of state and federal taxes, as long as you use the money for legitimate higher education expenses.

Illinois' stick comes into play if you're a state resident who invests in another state's college-savings plan: You'll pay state tax on that account's earnings.

Giannoulias has endorsed a bill that would end this punitive treatment for residents who, for whatever reason, choose to invest somewhere else. By making Bright Start much more attractive, he's made this a good time for the Legislature to go along with his recommendation.

The treasurer announced this week that Oppenheimer Funds will take over management of Bright Start and will reduce the plan's fees dramatically. Investors will pay about 0.2 percent a year to invest in index funds, and no more than 0.64 percent for actively managed funds, in the new plan. They had been paying 0.99 percent a year under previous manager Legg Mason.

The previous treasurer, Judy Baar Topinka, selected Oppenheimer as manager last fall. Giannoulias, who took office in January, reopened the bidding process and struck a better bargain. Scott Burnham, a spokesman for Giannoulias, said Oppenheimer agreed to add Vanguard index funds to the plan, reduce index-fund fees by about a third and make $3.5 million in scholarships available to Illinois students.

Investors who choose index funds will pay a $10 annual account fee. But, except for very small accounts, the overall cost should be much less than in the old plan. It also will be cheaper than Vanguard index-fund options offered by other states, including Missouri.

"It looks like Illinois really made a priority to keep its costs low," said Kerry O'Boyle, an analyst at Morningstar in Chicago. "Price is starting to be one of the main points of competition among the states. From our point of view, that's a good thing for investors."

Joe Hurley, president of SavingForCollege.com, said Illinois appears to have a cheaper index-fund option than any other state. Utah, which also uses Vanguard index funds, has annual expenses that start at 0.25 percent, and Missouri's index-fund option charges 0.62 percent.

The comparison isn't apples-to-apples. Illinois offers only three index funds, investing in large-company, small-company and international stocks. If investors want a plan that adjusts the mix of stocks and bonds as a child gets older, they have to use Oppenheimer's actively managed funds. Missouri, by contrast, packages a variety of stock and bond index funds inside its popular age-based investment option.

I've said before that Missouri's index-based plan (as opposed to a separate broker-sold plan, which is far too expensive) is a good, low-cost way to save for college. When the new Bright Start is launched a couple of months from now, Illinois investors will have an option that's just as good.