The cost of sending a kid to college is skyrocketing at a rate that has surpassed the rate of inflation for each of the last five years, according to the College Board. That makes saving for college a high priority for parents or guardians who wish for their children to get an undergraduate education. Many consumers are turning to 529 college savings programs (named after the section of the IRS code in which they appear) to help pay for higher education.
There are more than a hundred 529 plans to choose from, and every state offers at least one. CollegeSavings.org provides a list of plans available by state, as well as the opportunity to compare the key points of different plans.
The good news is that most plans are available to all U.S. residents, regardless of where someone lives. And in many cases investments can be used for institutions located anywhere in the country. That means a person could live in California, contribute to a 529 plan in Ohio and send a child to college in Florida.
This flexibility gives consumers plenty of options. The downside of having so many choices, however, is that a little extra work is needed to find the right plan.
Pre-paid versus savings plans
The two main flavors of 529 plans are pre-paid tuition plans and college savings plans. As the name indicates, pre-paid plans allow parents to purchase future tuition credits for a specific institution or set of institutions at current prices. The advantage here is that parents could conceivably pay all of a 2020 graduate's tuition at State U in 2008 dollars. But most pre-paid plans are restricted to state residents only, as is the case in Michigan, and Maryland. Some states, such as Massachusetts don't have residency restrictions.