"This legislation elevates investing in higher education to a new level," said Kelly. "The program will be available to residents and non-residents alike, and the choice of the accredited college, graduate, professional, or in some cases, vocational school is up to the beneficiary."

Under Internal Revenue Service Code Section 529, Qualified State Tuition Program, new federal tax rules will now permit individual donors to place funds into a tax-deferred higher education savings account for a beneficiary. SB 186 is the legislation needed to take advantage of this federal provision.

Individual donors may contribute up to $50,000 to a future student, gift-tax free, either in one lump sum or over a five-year period. The donors and beneficiaries need not be related. Earnings grow tax-deferred until they are withdrawn, and are then taxed at the student's rate at the time of withdrawal, typically 15%. Recent action in Washington, D.C., indicates that Congress may soon totally exempt "529" earnings from any taxation at all if the funds are used for education.

Kelly noted that the contributor retains some control of decisions about disbursement. "If parents or grandparents disapprove of the beneficiary's study plans, they can transfer the account to another beneficiary," he said. "This type of account is especially useful to donors for estate planning purposes, and the money isn't counted in their taxable estate if they die before the funds are used."

This plan can provide for investors to cash out if a student wins a scholarship, decides not to attend college, dies or becomes disabled. The University of Alaska would administer the plan and issue the initial requests for proposals from private sector investment firms to manage the Alaska Higher Education Savings Trust. Administrative fees would pay for the cost of the plan. More than 30 states have or are planning to offer college savings plans of this type. Kelly hopes to have the Alaska plan in place this tax year.

SB 186 moves to the House for consideration.