Widespread skepticism about prepaid tuition plans patterned after MET emerged in 1988, when states "largely began to prefer the college savings bond concept engineered by Illinois," researchers Aims McGuinness, Jr. , and Christine Paulson note in their 1989 survey for the Education Commission of the States. [15] Subsequently, Illinois' Baccalaureate Savings Act has emerged as the model for college savings bond programs nationwide. In January 1988, $90 million worth of bonds were sold in the first program's first sale, with demand possibly as high as $270 million. During the second sale, in September 1988, $255 million worth of bonds were sold, with demand as high as $400 million. Future sales are planned for the bands, which may be used for anything, including non-educational purposes.
Marketed as zero-coupon bonds that cost approximately $935 to $3,700, the Illinois program offers a $5,000 maturity over a five-to-20-year period. The Illinois zeros pay a rate of return that varies from 6.9 percent short-term to eight percent long-term, and a four percent annual bonus if they are used for tuition at in-state institutions of higher education. The bonus amounts to $20 per year per bond. Added incentives are the denomination, which is smaller than regular Illinois general obligation bonds. Another important aspect of the program is the educational and marketing effort required to inform parents about the options available for financing a higher education and the need to save money in advance. Finally, the bonds are tax-free and offer flexibility because they can also be used to pay for tuition at private colleges.
College savings bonds hold a more immediate, financial interest for states, in addition to the benefits of encouraging families to save for college. Unlike general obligation bonds, states issuing zero-coupon bonds are not liable for any interest until maturity because the interest is imputed at issuance. By comparison, general obligation bonds earn interest payable to bondholders every six months.
Researchers McGuinness and Paulson note that college savings bonds do not "pose any special risk to states in terms of an unknown financial liability. Unlike tuition pre-payment plans, college savings bond programs do not pretend to promise that the return on the security will keep pace with the cost of higher education ...Primarily because of the fewer risks involved, states in 1988 and 1989 have been more prone to adopt the college savings bond model."
One criticism of college savings bonds, McGuinness and Paulson note, is that "this sort of state involvement tends to give the appearance of official approval or license to a college savings program that may or may not be better than other alternatives. However, state officials generally say they are most interested in promoting college savings, rather than the bonds themselves." [17]