The state yesterday unveiled a revamped college savings program designed to give parents more investment options and tax benefits to help prepare for the costs of college.

Earnings in the new program will be exempt from federal and state income taxes when used for college expenses, state officials announced yesterday. The program is called the HI529 — Hawai'i's College Savings Plan.

In addition, parents will be able to choose from various investment options, including an option where investments will be adjusted as the student ages and five portfolio options that will allow parents to build and manage their own college savings.

"Tuition costs are increasing at a rate that is higher than your typical 3 percent savings account. So that's why this program is so important," said Peter Dao of the HI529 program.

The HI529 savings plan, named after Section 529 of the Internal Revenue Code, will be administered by Upromise Investments Inc. The Vanguard Group, a national mutual fund manager, will serve as the investment manager.

Previously, the state's college savings program, called TuitionEDGE, was managed by Delaware Investments, which had a contract with First Hawaiian Bank to offer the accounts through its investment program.

The previous program charged a $25 annual account fee and a management fee of 0.95 percent of assets. The new program charges a lower annual account fee, $20, and a lower management fee of 0.75 percent of assets.

State officials cited the rising costs of a college education as reasons to revamp the state's savings program.

Lt. Gov. James "Duke" Aiona said tuition at the University of Hawai'i-Manoa has risen by more than 34 percent from 2002 to 2006.

"We know that college tuition is increasing, and our college savings program that we started off with just wasn't growing as fast as it should to meet the demand," Aiona said.

The new program will give parents flexibility with their savings account, very similar to a 401(k) plan, said Jeff Howkins, chief administrative officer for Upromise Investments.

He also said the new plan gives parents more investment options, including a money market portfolio.

"Your after-tax dollars you invest would grow tax free. When you take money out for the beneficiary for qualified expenses, that money is tax exempt," Howkins said.

Qualified expenses would include tuition, some housing costs, books and other fees. Earnings on nonqualified withdrawals are subject to a 10 percent penalty.

Howkins said that a savings plan could be created with an initial contribution as low as $15. Parents may also set up automatic payroll deduction to go towards the college savings account.

State Rep. Mark Takai, D-34th (Waimalu, Newtown, Pearl City), who introduced the bill that created the first version of the college savings program in 2002, said he is seeking to create an additional state tax credit for the savings plan.

He said more than 32 states already offer residents some kind of tax deduction or tax credit on contributions made to a college savings plan. Hawai'i does not offer a similar tax break.

Aiona said the administration will seek a tax exemption for money contributed to college savings.

Currently, the state only offers tax exemptions on money withdrawn from a college savings plan.

Reach Loren Moreno at lmoreno@honoluluadvertiser.com.