Cars going the wrong way down a one-way street. Higher nighttime decibel levels on Massachusetts Street. Traffic, traffic, traffic.

Yes, the signs of another college school year are upon us.

For parents sending their children to college, there’s at least one other sign that the semester has begun: thinner checkbooks.

With a steady stream of tuition increases, state leaders haven’t done much to make a college education cheaper, but soon a new state law will make Kansas one of the more innovative states in the nation when it comes to how parents are allowed to save for college.

“I think what the state is getting ready to do is fantastic,” said Raquel Meyer Alexander, an assistant professor at the Kansas University School of Business. “It is really a pro-consumer move.”

Second in the nation

Beginning in January, Kansas will become the second state in the country to offer a state income tax deduction to any Kansas resident who invests in any state’s 529 plan, a special type of savings account that offers federal tax breaks for people saving for post-secondary education.

Currently, the state offers a tax deduction but only for Kansas residents who invest in the 529 plan run by the Kansas Treasurer’s office. With the new law, Kansas residents will receive the income tax deduction – up to $6,000 per student for a married couple or $3,000 per student for a single taxpayer – even if they invest in a plan run by one of the other 49 states.

That’s significant because each state offers different types of investment options in their 529 plans. Now, Kansas residents won’t have to worry about losing their state income tax deduction if they like the options in another state’s plan better than those offered in Kansas.

In addition to the state income tax deduction, all investors – regardless of what state they are in – receive a federal income tax break. Any money placed in a 529 plan grows tax-free. The money also can be withdrawn tax-free when it is used to pay for legitimate college expenses.

Kansas Treasurer Lynn Jenkins said she pushed for the change in Kansas’ policy because she was afraid some residents didn’t like the Kansas plan but weren’t choosing to invest in other states’ programs because they wouldn’t be eligible for the state income tax deduction.

“I don’t want to give anybody an excuse to not save for an education,” Jenkins said.

Comparing plans

Jenkins, though, said she didn’t push for the change because she thinks the Kansas 529 program is below par. She noted that the two 529 plan options the state offers both received ratings of 4.5 out of five stars on SavingforCollege.com, one of the more highly respected 529 Web sites.

But other rating organizations aren’t so sure. Morningstar – a respected rating body for mutual funds – gave the Kansas plans mixed reviews. Morningstar rated the Kansas Learning Quest Plan as a “decent” plan that investors should consider, though it called some of its management fees “relatively steep.”

Morningstar did not recommend investing in the state’s other 529 plan – the Schwab 529 College Savings Plan. It said the plan had “above-average costs” and a “questionable” strategy that was “ultra-conservative” in how it runs some of its funds.

Reform needed

Alexander, who as a KU tax professor has done extensive research on 529 plans, said such differing reviews aren’t that uncommon. She said Kansans likely would have a difficult time comparing all the different plan options that exist.

“The industry really needs to do something to make it easier for consumers to make good choices,” Alexander said. “Right now, 529 plans are not designed to be easy. There definitely needs to be some reform.”

Alexander said one step would be for the industry to create a single Web site that provides uniform reports for each 529 plan in the country. That way, investors would be able to judge the performance and fees of each plan much like investors do with stocks and mutual funds.

Alexander said the association that represents state treasurers is looking at creating such a Web site. Currently, 529 plans aren’t regulated by the Securities and Exchange Commission like publicly traded stocks are.

Alexander and others said that shouldn’t scare investors away from the plans, but it is a fact that should be kept in mind when comparing rates of return and other performance measures for the funds.

“It is a fact that 529 plans report their returns in many different ways, and they are not subject to the same regulatory scrutiny as many other types of investments,” Alexander said.

Peggy Johnson, a Lawrence financial adviser with Ameriprise Financial who sells 529 plans, agreed some of the information could be presented better but said it was still worth the time of investors to seek out rates of return before investing.

“I think the information is reasonably accurate,” Johnson said. “I don’t think there is any fraudulent activity going on with the returns. But is it always clear? Sometimes yes, sometimes no.”

Change on the way

In addition to the policy change that will take effect in January, other larger changes also could soon be happening to the Kansas plan.

Jenkins has taken the somewhat unusual move of seeking bids for a new management company to run the state’s 529 plan. Currently, American Century Investments – based in Kansas City, Mo. – manages the financial aspects of the plan.

Jenkins had the option to automatically renew American Century’s contract but instead chose to accept proposals from other management companies, too.

“I think we have a darn good plan,” Jenkins said, “but there is always room for improvement. That’s why we’re on the street again taking proposals.

“It has been six years since we last did that, and a lot has changed in that time. I’m anxious to see what else is out there. I think that competition will make us better.”

Proposals are due into the state by the end of the month. A state committee will review the proposals over the next several months, with a decision scheduled to be made before January.

American Century is being allowed to bid on the contract again. Stacey Belford, 529 plan business manager for American Century, said the company was working on a bid.

“We’re hopeful that we can put together a plan that will make it a no-brainer for the state to continue with us,” Belford said.

Jenkins said regardless of which company is chosen, investors should expect to see changes in the fees and investment options that are offered in the plan.

“There will be some sort of change come January,” Jenkins said. “Even if American Century wins the bid, it will not look like it does today.”