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Section 529 plans, also known as Qualified Tuition Programs (QTP), are among the best ways of saving for your children's college education. There are two types of section 529 plans, prepaid tuition plans and college savings plans. Both are named after section 529 of the Internal Revenue Code, which specifies the requirements for the plans to be free from federal income taxes. Prepaid tuition plans let you lock in future tuition rates at in-state public colleges at current prices and are usually guaranteed by the state. College savings plans are more flexible, but do not offer a guarantee.

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Every state (including Washington, DC) now offers a state section 529 plan, with thirty-two states offering just college savings plans, two states offering just prepaid tuition plans, and seventeen states offering both. Also, a group of several hundred private colleges offers a national prepaid tuition plan for private and independent colleges known as the Independent 529 Plan.

Participation in section 529 plans is growing rapidly. In 2000 a total of $2.6 billion was invested in the plans. This grew to $14 billion in 2001 and more than $92 billion in mid-2006. FinAid projects that there will be a total of $175 billion to $250 billion invested in 10 million to 15 million accounts by the year 2010.

A separate ratings page identifies the best section 529 college savings plans for state residents and non-residents and provides advice on selecting a 529 college savings plan.

What is a 529 Prepaid Tuition Plan?

Prepaid tuition plans are college savings plans that are guaranteed to increase in value at the same rate as college tuition. For example, if a family purchases shares worth half a year's tuition at a state college, these shares will always be worth half a year's tuition -- even 10 years later, when tuition rates may have doubled.

The main benefit of these plans is that they allow a student's parents to lock in tuition at current rates, offering peace of mind. The plans' simplicity is also attractive and most offer a better rate of return on an investment than bank savings accounts and certificates of deposit. The plans also involve no risk to principal, and often are guaranteed by the full faith and credit of the state.

Currently, prepaid tuition plans are operated by state governments, with the tuition guarantee based on an enrollment-weighted average of in-state public college tuition rates. A few have separate plans for two and four year colleges and for room and board. If the student attends an in-state public college, the plan pays the tuition and required fees. If the student decides to attend a private or out-of-state college, the plans typically pay the average of in-state public college tuition. The family will be responsible for the difference, if any.

Starting in 2004, individual educational institutions may offer their own prepaid tuition plans. The Independent 529 Plan is such a plan offered by a group of private colleges.

(If you are interested in an investment whose returns are indexed by the average increase in private college tuition, College Savings Bank offers the CollegeSure CD, which is a FDIC insured Certificate of Deposit with an interest rate based on the College Board's Independent College 500 Index. College Savings Bank manages Montana's section 529 college savings plan.)

Most plans require that either the account owner or the beneficiary be a state resident when the account is opened.

Anybody can contribute to a prepaid tuition plan, including grandparents and friends of the family. This lets people give the gift of education. Section 529 plans are especially good for grandparents, because of the estate planning features.

Prepaid tuition plans are exempt from federal income tax, and are often exempt from state and local income taxes. Favorable state tax status may be limited to the state's own plan. Some states offer a full or partial tax deduction for contributions to the state's plan. See the Tax Status section for more details.

The Higher Education Reconciliation Act of 2005 changed the financial aid treatment of prepaid tuition plans. Previously, they were treated as a resource, meaning that distributions reduced need-based financial aid dollar-for-dollar (100%). Effective July 1, 2006, however, they are now accorded the same financial aid treatment as section 529 college savings plans, where they are treated as an asset with an asset valuation equal to the refund value of the plan. See the Impact on Financial Aid section for more details.

If the child dies or decides to not go to college, the plans can be transferred to another member of the family.

The money in the plan is controlled by the account owner, not the child.

If the family moves out of state but the child attends a participating school, the family can still use the plan but may be held responsible for the difference between out-of-state and in-state tuition, depending on the plan. Some plans will treat such a student as an in-state student, allowing the plan to cover 100% of the cost.

Prepaid tuition plans do not guarantee admission into college.

A key potential benefit of prepaid tuition plans is they tend to act as a hedge against economic downturns. During recessions and for a year or two afterward, state governments tend to reduce support for higher education. This translates directly into increases in public college tuition rates. So when other investments are dropping due to a declining stock market, prepaid tuition plans will tend to increase. (Other investments with this characteristic include marketable zero coupon bonds, which go up in value when interest rates drop. The Federal Reserve Board tends to cut interest rates to stimulate the economy.) Thus a good diversification strategy would be to include a prepaid tuition plan with your other college saving investments, if only prepaid tuition plans didn't have such a harmful impact on need-based financial aid.

There are two main types of plans:

1. Prepaid Unit. Prepaid unit plans sell units that represent a fixed percentage of tuition, with 1 unit typically corresponding to 1% of a year's tuition. Everybody pays the same price for the units and the price of a unit increases each year. The parent can buy as many units as they want each year.
2. Contracts. Contract plans sell contracts, where the parent agrees to purchase a specified number of years of tuition. The purchase price depends on the age of the child and on the type of payment (lump sum or installment). Contract plans usually offer lower prices for younger children, since the state has more time to invest the money.

Prepaid tuition plans encourage parents to save for their children's education and offer them peace of mind. They are not necessarily the best way to save for college, but provide a safe, affordable, tax exempt and convenient option for families who may not be very knowledgeable about investing. There are many benefits to prepaid tuition plans -- especially for middle-income and upper-income families who may not qualify for need-based aid -- but they are not for everyone.

Before investing in a prepaid tuition plan, parents should carefully evaluate the plan and their other investment options. From an investment perspective, a prepaid tuition plan is a low-risk, tax-advantaged investment vehicle, with earnings indexed to the average increase in tuition. Since tuition rates seem to increase at about twice the inflation rate, the earning potential is probably greater than the interest earned from bank savings accounts and certificates of deposit (CDs). On the other hand, the negative impact on eligibility for student financial aid eligibility should be taken into account.

If the parents are willing to accept a greater amount of risk, they might be able to do better investing on their own. FinAid's prepaid tuition calculator compare the effective return on investment of a prepaid tuition plan with the after-tax return on investment of alternate investments. Some accountants advise families to invest in a diversified portfolio of mutual funds. For example, the Standard & Poors 500 index (S&P 500) has historically gone up by about 10% a year, offering a better rate of return than most prepaid tuition plans. On the other hand, the S&P 500 isn't guaranteed to always increase at the same rate and in some years it might have a worse return than a prepaid tuition plan. The opportunity for greater returns comes with a correspondingly greater risk.

Details of the plans may vary significantly from state to state.

What is a 529 College Savings Plan?

Section 529 college savings plans are tax-exempt college savings vehicles with a low impact on need-based financial aid eligibility. Unlike prepaid tuition plans, there is no lock on tuition rates and no guarantee. Investments are subject to market conditions, and the savings may not be sufficient to cover all college costs. However, with this added risk comes to opportunity for potentially earning greater returns.

Most 529 college savings plans offer an adaptive asset allocation strategy based on the age of the child or the number of years until enrollment. These plans start off aggressively when the child is younger, and gradually switch to more conservative investments as college approaches. Typically they will use four or five age ranges, such as newborn-6, 7-9, 10-12, 13-15, and 16-18+.

Most 529 college savings plans also offer a variety of risk-based asset allocation portfolios, ranging from aggressive 100% equity funds to more conservative balanced funds and money market funds.

Some 529 college savings plans offer a fund that protects the principal against inflation and guarantees a minimum fixed rate of return (typically 3%).

The money in the plan is controlled by the account owner, not the child. So if the child decides to not go to college, they do not have access to the funds as they would with an UGMA account.

Section 529 college savings plans are similar in many ways to retirement plans, such as 401(k) and IRAs, although with much higher contribution limits and more favorable tax status.

Every parent should consider investing in a 529 college savings plan for their children.

Contributions

Anyone can contribute money on behalf of a beneficiary. Relatives, friends, colleagues, acquaintances and even complete strangers can contribute to a child's section 529 plan.

The favorable gift tax treatment of 529 plans makes them a good estate planning tool, especially for grandparents. See the Tax Status section for details.

Federal law requires that a 529 college savings plan must have safeguards to prevent contributions in excess of those necessary to provide for the qualified higher education expenses of the beneficiary, but does not otherwise specify a limit on contributions. Each state therefore sets its own limit. Most states use a limit that is based on an estimate of the amount of money that will be required to provide seven years of post-secondary education (including both undergraduate and graduate school). Even so, there is considerable variation in state cumulative contribution limits, which range from $146,000 to $305,000. The median limit is $235,000.

Section 529 prepaid tuition plans typically have a much lower contribution limit, based on the current cost of four years of in-state public colleges. Typically this ranges from $50,000 to $100,000.

Most states allow for periodic transfers from your checking or savings account in addition to lump sum contributions. Automatic payroll deduction is less common, but is growing in popularity as the states add it.

Tax Status

Currently, investments in 529 plans are usually exempt from federal, state, and local taxes.

• Earnings in section 529 plans accumulate on a tax-deferred basis. The annual increase in value is not subject to annual capital gains taxes.
• Redemptions are also exempt from federal income tax if used to pay for qualified higher education expenses such as tuition, room and board, fees, books, supplies and equipment.
• Most states accord a similar favorable tax treatment to 529 plans, letting the earnings accumulate on a tax-deferred basis and exempting them from state and local income tax if used for qualified higher education expenses. Often, however, this favorable tax treatment is limited to redemptions from the state's own 529 plans. Alabama's section 529 college savings plan appears to be the only state plan that is not state tax exempt. (The earnings in Alabama's college savings plan accumulate on a tax-deferred basis. Alabama's prepaid tuition plan, however, appears to be exempt from state income taxes.)

Contributions to a section 529 plan may be deductible on your state income tax. A total of 32 states offer a full or partial income tax deduction for contributions to the state's 529 plan or have no income tax. Of those, five states offer a full income tax deduction, twenty states a partial income tax deduction, and seven states have no income tax. Those states that offer a partial income tax deduction often allow a carry forward of excess contributions for up to 5 years.

Since state income tax benefits may be limited to the state's own plan, look first at the plans in your state and/or the state in which the beneficiary lives.

If you cancel the account and receive a refund, you will have to pay federal income taxes on the earnings, plus possibly a 10% tax penalty. The earnings portion of non-qualified withdrawals is taxed as ordinary income to the distributee, which is typically the account owner. There is also a 10% tax penalty, except in cases of death or disability or receipt of a scholarship. (In such cases the account owner has the option of changing the beneficiary to avoid income tax on the earnings.) There may also be state and local income taxes and penalties, in addition to any plan penalties.

Series EE and I US Savings Bonds issued after December 31, 1989 may be redeemed tax-free in order to contribute the proceeds to a section 529 plan or Coverdell Education Savings Account. (To take advantage of this, file IRS Form 8815 to claim an exclusion for the interest after rolling the proceeds of these US Savings Bonds into a section 529 college savings plan or Coverdell Education Savings account. Write "529 College Savings Plan" or "Coverdell Education Savings Account" in the answer to 1(b), where it asks for the name of the educational institution. The specific citation in the tax code for this guidance is IRC Section 135(c)((2)(C).)

Coverdell Education Savings Accounts may be redeemed tax-free in order to contribute the proceeds to a section 529 plan.

There are a variety of coordination restrictions that govern redemption of section 529 plans in conjunction with the other education tax benefits. These restrictions prevent you from gaining more than one tax benefit for the same educational expenses on your income tax return. The Education Tax Benefits Coordination section of FinAid summarizes these restrictions and offers tips on allocating education expenses in a way that maximizes your tax benefits.

The favorable federal income tax treatment is now permanent, and will no longer end on December 31, 2010. See the Sunsetting section for details.

Gift and Estate Tax Benefits

Section 529 plans also provide favorable federal estate and gift tax provisions, making them a valuable estate planning tool. There is an accelerated gift option that allows you to average gifts over $13,000 per beneficiary ($26,000 for married couples) over a five year period without incurring federal gift tax. So an individual can contribute up to $65,000 per beneficiary in one year and a couple up to $130,000 per beneficiary without incurring gift tax. If you give the full amount, you will not be able to give any gifts to the same individual during the five year period without incurring gift tax or using up a part of your lifetime exclusion.

Contributions below the annual gift tax threshold are immediately removed from the donor's gross taxable estate (and included in the estate of the beneficiary). Unlike certain types of trust funds, contributions to section 529 plans are considered a completed gift of a present interest and so are excluded from the donor's gross estate. Contributions above the threshold are included in the donor's gross estate only if the account owner cancels the account or the donor dies during the five year averaging period. If the donor dies during the five year period, the contributions are counted in his or her estate pro-rata according to the number of remaining years, not including the year in which the donor died.

Impact on Need-Based Financial Aid Eligibility

The need-based financial aid treatment of family assets depends on whether they are owned by the student or the parent. During need analysis, the federal financial aid formula assesses a percentage of student assets and a percentage of parents assets. Student assets are assessed at a flat rate of 20% (effective July 1, 2007). Parent assets are assessed on a bracketed scale with a maximum rate of 5.64%. Parent assets are also partially sheltered by an asset protection allowance based on the age of the older parent (around $45,000 for most parents of college-age children). Parent assets in retirement plans and the net market value of the family's primary residence are also sheltered, as well as small businesses owned and controlled by the family. Accordingly, the impact of a college savings plan on need-based financial aid depends on whether the plan is considered a student asset, a parent asset, or neither.

A separate section discusses account ownership for each type of college savings vehicle and its impact on financial aid eligibility. The following summarizes the impact of section 529 plans on financial aid eligibility:

• Section 529 college savings plans are treated as an asset of the account owner, and so have a low impact on financial aid eligibility. College savings plans are reported on the Free Application for Federal Student Aid (FAFSA) as an asset of the account owner, which is typically the parent. Distributions from a college savings plan have no impact on financial aid eligibility (i.e., they are not counted as untaxed income or a resource).
• Section 529 prepaid tuition plans are now treated as an asset and are reported on the FAFSA, just like section 529 college savings plans. The asset value is the refund value of the plan. Distributions have no impact on financial aid eligibility. This change went into effect July 1, 2006. (Previously they were treated as a resource, which reduced need-based financial aid 100%.)

Starting in 2009-10, the custodial versions of qualified tuition accounts (section 529 college savings plans, prepaid tuition plans, and Coverdell education savings accounts) are treated as parent assets if the child is a dependent student and as a student asset if the child is an independent student.

This more favorable treatment of custodial qualified tuition accounts was enacted by the College Cost Reduction and Access Act of 2007 with an effective date of July 1, 2009. This legislation corrected a legislative drafting error in the Higher Education Reconciliation Act of 2005 which temporarily caused custodial qualified tuition accounts to be disregarded as assets on the Free Application for Federal Student Aid (FAFSA) in 2006-07, 2007-08 and 2008-09.

In some states money in the state's 529 plan does not affect eligibility for state grants. States which shelter the assets in a 529 plan from the state need analysis process include: Illinois (State College Savings Bond Program), Indiana, Kentucky, New York, Pennsylvania, and Virginia.

Parents who have saved money in their child's names using a traditional UGMA or UTMA account should consider liquidating the account and rolling the money over into the custodial version of a 529 college savings plan. UGMA and UTMA accounts are treated as child assets, with a negative impact on financial aid eligibility. Money in a custodial 529 plan is treated as a parent asset, which is more favorable than a child asset. This will significantly improve the eligibility for need-based financial aid.

Previously, if a section 529 college savings plan was owned by someone other than the parent or child (e.g., a grandparent), the plan could be omitted entirely from the financial aid need analysis, affecting neither income nor assets. This loophole, however, was eliminated by the College Cost Reduction and Access Act of 2007 effective with the 2009-10 award year. Such 529 plans are still not reported as an asset on the FAFSA, but any distribution from the 529 plan is reported as untaxed income to the beneficiary, resulting in a severe reduction in eligibility for need-based aid. (This applies only to the FAFSA. The CSS Profile asks the family to list all 529 college savings plans that name the student as a beneficiary, so plans owned by a grandparent but with the student named as a beneficiary would have to be reported.)

Qualified Higher Education Expenses

Qualified Higher Education Expenses for section 529 plans typically include tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible higher education institution.

Room and board are included only for students who are enrolled at least half-time. Room and board expenses are limited to the actual school charges for students who live on campus in housing owned or operated by the school, and to the school's budget figures (as listed in the school's published cost of allowance figures) for students who live off campus or at home and for independent students.

Computers are included as higher education expenses only if the school specifically requires a computer for enrollment or attendance. (The American Recovery and Reinvestment Act of 2009 modified the definition of qualified higher education expenses for 2009 and 2010 to include the purchase of computer equipment even if not required by the school.)

529 plans can also be used to fund graduate school. Some states, however, limit their plans to undergraduate education.

Expenses for special needs services are also included if they are incurred by a special needs beneficiary in connection with enrollment or attendance.

Rollovers and Changes in Investment Strategy

Section 529(c)3(C) Change in Beneficiaries or Programs specifies the conditions upon which a rollover is permitted:

• Rollovers are permitted once per twelve month period to another section 529 program for the benefit of the same beneficiary.
• Rollovers are permitted for the benefit of another beneficiary who is a member of the family of the old beneficiary. There is no restriction on the number of times this can occur per twelve month period.
• Changes in the beneficiary are permitted if the new beneficiary is a member of the family of the old beneficiary. There is no restriction on the number of times this can occur per twelve month period.

According to IRS Notice 2001-55, account owners may change the investment strategy selected for a section 529 account once per calendar year or upon a change in the designated beneficiary of the account.

For the purpose of changing the designated beneficiary, a "Member of the Family" includes the following:

• children and grandchildren of the old beneficiary and their descendants,
• the step-children of the old beneficiary (but not their descendants),
• the siblings and step-siblings of the old beneficiary (including brother, sister, stepbrother and stepsister),
• the parents and grandparents of the old beneficiary and their ancestors,
• the stepfather and stepmother of the old beneficiary (but not their parents),
• the nieces and nephews of the old beneficiary (son or daughter of a brother or sister, but not of stepbrother or stepsister),
• the aunts and uncles of the old beneficiary (brother or sister of the father or mother, but not of stepmother or stepfather),
• the in-laws of the old beneficiary (son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law and sister-in-law),
• the spouse of any individual listed above,
• the first cousins of the old beneficiary, and
• the spouse of the old beneficiary.

• The account owner controls access to funds. If the beneficiary doesn't go to college, the account owner can get his or her money back (with income taxes and a 10% penalty owed on earnings) or change the beneficiary to another family member. This is unlike an UGMA or UTMA account, where the child assumes control upon reaching the age of majority and can spend the money on anything they want.
• Both types of 529 plans offer tax-deferred growth and tax-free withdrawals. The savings and accumulated earnings are exempt from federal income tax if the distributions are used for qualified higher education expenses.
• There may also be state income tax benefits for the state's plan, such as qualified withdrawals being tax exempt (most states) and full or partial state income tax deductions for contributions (half the states).
• The assets in a section 529 plan are not considered part of the account owner's taxable estate and are transferred immediately out of the donor's estate. (If you take advantage of accelerated giving and die within five years, a portion of the contribution will be included in your gross estate.)
• Because contributions to a 529 plan are considered a present interest, contributions of up to $13,000 per beneficiary ($26,000 from a married couple using gift-splitting) are exempt from gift taxes.
• The accelerated gifting option allows one to contribute up to $60,000 per beneficiary and average the contribution over a five year period to avoid gift taxes. Married couples can contribute up to $130,000 per beneficiary through gift splitting. If you contribute more than these limits, you can use the unified credit to offset the gift tax.
• The gift tax provisions makes section 529 plans a great estate planning tool for wealthy families who want to minimize estate tax liabilities.
• Section 529 plans provide a great opportunity for grandparents to contribute to the education of their grandchildren.
• The account owner can choose any initial beneficiary.
• The account owner can change the beneficiary at any time, provided that the new beneficiary is a member of the family of the old beneficiary.
• The account owner can rollover funds to a different 529 plan or change investment strategies once a year.
• The account owner can use money in US Savings Bonds (Series EE since 12/31/1989 and Series I) and in Coverdell Education Savings Accounts to fund a 529 plan without incurring income tax.
• No income phaseouts on contributions or withdrawals.
• 529 plans are managed by experienced investment companies, such as Vanguard, Fidelity and TIAA-CREF.
• You can contribute to both a 529 plan and a Coverdell Education Savings Account in the same year for the same beneficiary.
• You can still take advantage of other education tax benefits, such as the Hope Scholarship and Lifetime Learning tax credits and Coverdell Education Savings Accounts so long as different qualified education expenses provide the basis for each program.
• The minimum investment amount is often much lower than that required by most mutual funds, making section 529 plans more accessible and affordable for lower income families.
• The plans also offer simplicity, by limiting the available investment choices. As such, they may appeal to parents who do not have the time or knowledge to manage their own investments.
• Disciplined saving. Section 529 plans typically require parents to begin contributing on a regular schedule years before their children matriculate in college. By requiring consistent and systematic payments at regular intervals, section 529 plans get parents to start saving and investing for college sooner. Many plans include features that make it easy to set aside money regularly, such as payroll deduction and automatic transfers from a checking or savings account.
• Most section 529 plans also offer lump sum investments, which may be useful in other circumstances, such as divorce settlements and probate of a will.

The advantages of section 529 college savings plans are as follows:

• Low impact on financial aid eligibility, because section 529 college savings plans are considered assets of the account owner and not the beneficiary.
• Very high cumulative contribution limits, typically around $235,000 per beneficiary and as high as $305,000 per beneficiary.
• No restrictions on choice of college, other than that it must be an accredited post-secondary institution.
• Flexible investment options, such as age-based asset allocation strategies and risk-based asset allocation strategies. Many offer a choice of professionally managed funds and index funds.
• Can enroll at any time.
• No date by which funds must be used.

The advantages of section 529 prepaid tuition plans are as follows:

• Low impact on financial aid eligibility, because prepaid tuition plans are considered assets of the account owner and not the beneficiary.
• Peace of mind. Parents who invest in a prepaid tuition plan know that it will keep pace with the faster-than-inflation increases in college tuition, letting them lock in future tuition rates at today's prices.
• Most state prepaid tuition plans are guaranteed by the full faith and credit of the state.
• The return on a prepaid tuition plan is often superior to the typical return on a bank savings account or certificate of deposit. (The one exception to this is the CollegeSure CD from College Savings Bank, which is similar in many ways to prepaid tuition plans.
• Low risk. Many parents have a low tolerance for risks to principal in their college savings accounts, so the low risk of prepaid tuition plans is very attractive.

Some states allow you to contribute funds by charging it to a credit card. If you're the type of person who pays off your balance in full each month, and your credit card offers rewards for charges (e.g., Discover Card's cash back, Citibank's Driver's Edge), you may be able to get additional rewards for your contribution.

Prepaid tuition plans are often popular in divorce cases because they allow each parent to pay a specified percentage of college costs and because the parents can use a lump sum contribution to discharge their obligation.

The advantages of saving through a section 529 plan increases with increases in the family's income tax bracket, with the availability of state income tax deductions for contributions, with the amount of money invested, the amount of time available for the investment to grow, and the size of the fees and sales charges.

This means that higher income families who can invest more, and families who start saving sooner, will obtain the greatest benefit from section 529 plans. Lower income families who are not able to save as much will find that the annual maintenance and minimum balance fees can erode a greater percentage of their returns. But families at every income level should pay attention to the fees, because even a difference in fees of just 0.5% can have a big impact on returns.

Disadvantages

The disadvantages common to section 529 prepaid tuition plans and section 529 college savings plans are as follows:

• The earnings portion of non-qualified withdrawals is taxed as ordinary income at the account owner's rates, plus a 10% tax penalty. If the beneficiary dies, becomes totally and permanently disabled, the 10% tax penalty is waived. If the beneficiary receives a scholarship, the 10% tax penalty is waived on distributions up to the amount of the scholarship. States may also assess their own penalties in addition to income tax on the earnings portion of the distribution.
• Section 529 plan accounts are not necessarily protected from creditors of the account owner or beneficiary. Such protections vary from state to state. For example, Medicaid might be able to use the funds if the account owner needs nursing home care and has no other funds available.
• Both types of plans have been around for just a few years, so it is difficult to evaluate their long-term investment performance.
• Less disclosure is required for the managers of section 529 plans than for other types of investments.
• Many families find it difficult to find the money to fund a section 529 plan.

The disadvantages of section 529 college savings plans are as follows:

• State tax benefits may be limited to the state's own section 529 college savings plan.
• You are limited to the investment options provided by the plan.
• Although the more aggressive investment options offer a greater potential return, they also offer a greater potential risk. Except for principal protection portfolios like money market accounts and guaranteed investments (offered by a few states), the principal you invest is at risk. If the program's manager makes bad investment decisions or the stock market declines, you could lose money.
• Expenses and sales charges may be higher than what you'd pay if you invested the money yourself. Some plans charge excessively high sales loads of as much as 5% or 6% and management fees of as much as 2% a year.

The disadvantages of section 529 prepaid tuition plans are as follows:

• Prepaid tuition plans may offer a return on investment that is not as good as other investments. A family with financial savvy might be better off investing the funds on their own through a section 529 college savings plan.
• Your investment in a prepaid tuition plan may not meet the full cost of private or out-of-state colleges. In most states the plans are geared toward in-state public colleges.
• The enrollment period may be limited.
• There may be penalties and/or reductions in investment returns for non-qualified withdrawals or account cancellation.
• Many state prepaid tuition plans are limited to tuition and fees, and do not include savings for room and board. So the family may need to plan separately for these additional costs.
• In many states the account owner or the beneficiary must be a state resident when the account is opened.
• Maximum contributions are much lower than for section 529 college savings plans.
• Many prepaid tuition plans include a 10-year time limit from the date of expected college entrance or high school graduation. Another less common limit is a requirement that the funds be used by the time the beneficiary reaches age 30.

Eligible Schools

A database of all eligible schools can be found on the US Department of Education web site. You can also call the US Department of Education at 1-800-872-5987.

For tuition rates at US colleges and universities, visit the IPEDS COOL tuition finder.

Sunsetting

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made several improvements to qualified tuition programs in section 402. These improvements were set to expire on December 31, 2010. However, Section 1304 in Title XIII of the Pension Protection Act of 2006 (P.L. 109-280) eliminated the sunset. This means that the following provisions relating to section 529 plans are now permanent:

• Federal tax-free distributions if the withdrawal was used for qualified higher education expenses. (Before EGTRRA-2001, section 529 plans grew in a tax-deferred fashion, and the earnings portion of withdrawals were taxed as ordinary income at the rate of the beneficiary.)
• Tax-free rollovers to another section 529 plan once per twelve-month period without requiring a change of beneficiary.
• During a change of beneficiary, the new beneficiary may be a first cousin of the old beneficiary.
• Educational institutions may establish their own prepaid tuition plans starting in 2004.
• Qualifying expenses include certain additional expenses for special needs beneficiaries.
• Non-qualified distributions are subject to a 10% tax penalty.
• Allowed one to use a section 529 plan, Coverdell Education Savings Account, Hope Scholarship and Lifetime Learning tax credit in the same year, so long as different qualifying expenses were used as the basis for each program.
• Allowed contributions to both section 529 plans and the Coverdell Education Savings Accounts for the same beneficiary in the same year.
• The cap on room and board for students living off campus (but not at home) were increased from $2,500 to the amounts as published in the school's cost of attendance student budget.

For more information about section 529 plans and other education tax benefits, please see IRS Publication 970, Tax Benefits for Higher Education.

There are also a variety of professional resources that will be of interest primarily to state government administrators, financial aid professionals and public policy analysts.