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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.<\/p>\n
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:<\/p>\n
What it is:<\/strong> 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<\/a> has an easy to navigate map.<\/p>\n Limits:<\/strong> Very high contribution limits (more than $200,000, on average), and no income restrictions.<\/p>\n Investment choices:<\/strong> 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.<\/p>\n Impact on financial aid:<\/strong> The account is considered an asset of the parent (or grandparent), which has a lower impact on financial aid.<\/p>\n Why choose a 529 savings plan:<\/strong> 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.<\/p>\n While each plan is different, here’s generally what you need to have on hand to open a 529 account:<\/p>\n 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.<\/p>\n Related >> College savings basics<\/a><\/strong><\/p>\n What it is:<\/strong> 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.<\/p>\n 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.<\/p>\n Limits:<\/strong> 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.<\/p>\n Investment choices:<\/strong> None — all the money is managed by the states. The “rate of return” is essentially the future growth of tuition. College costs<\/a> have been rising roughly six times the rate of inflation.<\/p>\n Impact on financial aid:<\/strong> The plan is considered an asset of the parent as long as the student is a dependent.<\/p>\n Portability:<\/strong> 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.<\/p>\n<\/span>Checklist for Opening a 529 Plan<\/span><\/h2>\n
Account Owner Information<\/h3>\n
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Beneficiary Information<\/h3>\n
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Funding Information<\/h3>\n
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<\/span>529 Prepaid Plan<\/span><\/h2>\n