Baby in graduation gown, holding a diploma for an article on 529 plans

Saving for college is daunting enough, but as any parent of college-age kids can tell you, you also need to learn a whole new vocabulary — FAFSA, 529 plans, Coverdell accounts.

It can be a lot to process. One common question is the difference between a 529 plan and a 529 “prepaid” plan. While pre-paid plans aren’t nearly as common as they used to be, it’s important to know the difference. Here’s all that you need to know:

529 college savings plan

What it is: An account sponsored by states but administered by financial-services firms. Families are not required to choose their own state’s plan — which is good, given that not every state has one — but some states do offer tax breaks to citizens who choose the in-state plan. To find out more about your state’s 529 plan, Savingforcollege.com has an easy to navigate map.

Limits: Very high contribution limits (more than $200,000, on average), and no income restrictions.

Investment choices: A selection of mutual funds, including age-based portfolios, which are allocated among various asset classes and gradually get more conservative as the student nears college age. Generally, investment selections can be changed just once a year.

Impact on financial aid: The account is considered an asset of the parent (or grandparent), which has a lower impact on financial aid.

Why choose a 529 savings plan: You can contribute more than $2,000, you want to save for college costs beyond tuition, you value the tax deduction offered by your state (if applicable), and you don’t mind the limited investment choices.

Checklist for Opening a 529 Plan

While each plan is different, here’s generally what you need to have on hand to open a 529 account:

Account owner information

  • First and last name
  • Social Security Number
  • Date of Birth
  • Mailing address, email, phone numbers

Beneficiary information

  • This is typically your child or grandchild or the person for whom the fund is being set up.
  • First and last name
  • Social Security Number
  • Date of Birth
  • Mailing address

Funding information

  • Checking or savings account
  • Account number, including routing
  • Name as it appears on account
  • Bank name and phone number

You can fund via electronic transfer, or if you prefer, can send checks to a physical address. Some plans can also deduct contributions from your paycheck.

Related >> College savings basics

529 prepaid plan

What it is: An account offered by some states that locks in tomorrow’s tuition at approximately today’s prices (or at a small premium). The lock on tuition applies only at in-state schools; the funds in the account can be used at a private or out-of-state school, but with no guarantees that they’ll cover the entire cost of tuition.

A consortium of private schools also offer their own prepaid plan, which provides guarantees for students who attend any one of the 270 participating universities. Only 16 states offer prepaid plans, and some have closed their plans to new investors. Low investment returns and budget reductions are causing some experts to question whether all states can fulfill their promises to participants in prepaid plans.

Limits: The contribution amounts are set the by states, based on factors including expected tuition growth and investment returns. Participants can only contribute at certain times of the year. Many plans prohibit students already in high school from opening a new account.

Investment choices: None — all the money is managed by the states. The “rate of return” is essentially the future growth of tuition. College costs have been rising roughly six times the rate of inflation.

Impact on financial aid: The plan is considered an asset of the parent as long as the student is a dependent.

Portability: You can typically use the money at different schools (or on a sibling’s education) if your child does not choose to go to the target college or colleges — or to college at all — but be aware some plans will charge cancellation fees and/or only give you back the original contribution, no interest.

Related >> Are you saving enough for college?

Why choose a prepaid plan: If you live in a state that offers a plan (or choose to participate in the private colleges’ consortium), you want to lock in today’s costs, and you’re reasonably sure your student(s) will attend a participating school, a prepaid plan may be for you.

Prepaid plans are also attractive to those who would prefer their funds to be managed by the state, rather than self-managed and subject to the whims of the markets. As mentioned, though, some states may not be financially capable of fulfilling their obligations to participants in prepaid plans. Finally, most of these plans just cover tuition; you’ll have to choose another account to save for other expenses, such as room and board.

GRS is committed to helping our readers save and achieve their financial goals. Savings interest rates may be low, but that is all the more reason to shop for the best rate. Find the highest savings interest rates and CD rates from Synchrony Bank, Ally Bank, and more.