Posted on Wed, Sep. 16, 2009
One way to save for college is to invest in a 529 plan. The more popular option is the 529 savings plan, which lets investments for college-related costs grow tax free. Another option is the prepaid tuition plan, which lets you lock in a price for a school.
Here's how the two stack up.
ELIGIBILITY
Savings: You can invest in any state's 529 savings plan, although there are usually tax benefits to picking one from home.
Prepaid: They're usually limited to state residents and apply to the state's public colleges. There is also the Independent 529 Plan for private colleges.
COSTS
Savings: A minimum deposit might be required to open an account, but you determine how much you want to invest.
Prepaid: Pricing and terms vary depending on where you live, the child's age and the length of the payment plan. Plans are usually about 10 percent to 20 percent more than current state tuition rates.
USES
Savings: Distributions must be used for college-related costs such as tuition, books, room and board and books.
Prepaid: Plans only cover tuition and fees.
EXCEPTIONS
Savings: The penalty on distributions for non-college related costs can be waived for select reasons, such as the winning of a scholarship.
Prepaid: Some plans allow buyers to carry the value of tuition credits to private or out-of-state schools.
RISKS
Savings: As with any investment, of course, there are no guarantees. One way to guard against the market's volatility is to pick an age-based plan, which automatically shifts investments to reduce risk as the child nears enrollment age.
Prepaid: Even if your tuition is already locked in, the plan is investing your money to pay the guaranteed costs. So there might be pressure to meet payment obligations if the market plunges. Plans generally keep a certain level of cash on hand, but it's worth asking about guarantees.
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