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The Best Way to Save for College: 529 Prepaid Plans

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On Monday, I launched a new series on the best ways to save for college. We explored 529 college savings plans, concluding that when you carefully compare fees and state benefits, you can really score with a college savings plan.

Today we are looking at the other type of 529 Plan — the prepaid tuition plan. (By the way, if you want to know why there are two different plans, both called 529s, check out this article on the difference between College Savings and Prepaid Plans.)

529 Prepaid Tuition Plans

What is it: A savings vehicle that allows you to lock in future tuition payments at today’s in-state rates.

Pros: “Guaranteed” return on your investment; money can be applied to tuition at out-of-state schools (although it obviously won’t cover as much); many states now offer tax deductions for investors; account is considered parental asset on FAFSA, so it doesn’t have overly negative impact on financial aid award.

Cons: Limited to the plans in your state of residence; lower potential gains than with college savings plan, since tuition only increases an average of 7%, while the stock market has historically gained 10-12% over a ten-year span (of course, given the state of the market, those who opted for the more conservative tuition plans over mutual fund-invested college savings plans look like geniuses right now!)

Bottom Line: Investigate your state’s plan carefully before picking this less flexible option.

So what do you think? Which 529 Plan sounds better to you: the college savings or the prepaid tuition? Stay tuned next week when I discuss the Coverdell ESA.

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