Maine’s hugely successful college savings plan suffered a minor setback when it got caught up in the struggle to balance the state budget. These savings plans, which allow federal and state tax-free earnings if used for higher education, vary from state to state. Maine has been a fierce competitor, drawing heavy investment from across the country. Until now, Maine has not taxed Mainers for qualified withdrawals from their investments in other states’ plans. But Part 1 of the ’04-’05 budget, decoupling some state provisions from federal provisions, temporarily removed this exemption.

State Treasurer Dale McCormick found that move would save a measly $28,000 in two years – far less than the state would lose by contributing to punitive interstate rivalry, in which each state tries to build a little fence around its own plan. A correction was expected this week in Maine’s supplemental budget.

The investors are the losers in mounting competition among state plans. Merrill Lynch, which handles Maine’s college savings plan, is leading an effort to equalize these so-called 529 plans. Management fees now vary greatly, averaging 140 basis points (0.014 percent) in Maine and up to 300 basis points in some other states. And, while Maine does not allow tax deductions for investments in its plan, some other states make them partly or completely deductible.

Total investment in Maine’s plan has soared from $374 million in late 2000 to $1.6 billion currently, making it sixth biggest in the nation. Merrill Lynch hands Maine 0.15 percent of the total. That means $1.5 million this year, which goes mostly for scholarships and matching grants for Mainers with moderate incomes.

Nearly 500 Maine households with incomes under $50,000 are already taking advantage of a special provision that lets them make a starting investment of only $50 instead of the standard $250. The state provides the additional $200 and adds further subsidies in subsequent years.

When it comes to earnings, of course, many of the NextGen portfolios, like other investments, have lost 20 percent or more in the bear market. Still, the Maine plan is among the most popular, partly because it offers among the widest in investment choices and its relatively low management fees. If the stock market at last starts a sustained rise, this could prove to have been a great time to invest inequities. College costs keep rising, and it pays to prepare for them with tax-free savings.