The Treasury Department is seeking public comments on tax-advantaged college savings plans that involve municipal securities, including whether tax subsidies are the most cost-effective way to make college affordable for low- and middle-income families.

In a release issued Monday, the department set an Aug. 14 deadline for receiving the comments and asked that they be submitted electronically through the Federal eRulemaking Portal, specifically the Treasury section at http://regulations.gov.

The Treasury plans to use the comments for a report it must submit to the White House Middle Class Task Force on how to make prepaid tuition and college savings plans set up under Section 529 of the federal tax code more effective and reliable, particularly as the recession has diminished investors holdings across the nation. The task force, led by Vice President Joe Biden, is working to raise the living standards for working middle-class families.

Currently all 50 states and the District of Columbia offer 529 plans, which are used by more than 11 million families to save for higher education, according to the College Savings Plans Network, an affiliate of the National Association of State Treasurers. Typically in these plans, adults invest money in state trust funds to cover the future college costs of their children or other beneficiaries. The investment earnings are not taxed until the money is used for college and the tax rate is based on the beneficiary's income level.

The Securities and Exchange Commission has issued guidance stating that because the plans are offered by states, they involve municipal securities. Broker-dealer firms or other firms marketing the plans must comply with Municipal Securities Rulemaking Board rules.

In its notice, the Treasury asks if the plans make the most sense for making higher education affordable for low-income families.

The department also wants to know if state matching grants would be an effective means of encouraging Section 529 contributions from low and moderate income families.

The Treasury poses the question of whether 529 savings plans are invested wisely or are too heavily invested in equities. It also asks for public comments on the extent to which college savings plan investment options are prudent and whether they accommodate reasonable attitudes toward risk.

"Should plans take steps to better assist account owners in making prudent investment choices?" the Treasury asks. "If so, what steps would be appropriate?"

It also seeks comments on whether the fees for investing in such plans are similar to the fees for retail mutual funds and what factors might explain any differences.

"Do prepaid tuition plans assess a reasonable premium in exchange for reducing participant risks with respect to investment returns and increases in the cost of attending college?" the notice asks.

Further information about the notice is available at 529ReportInput@do.treas.gov.

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