April 10th, 2010Prepaid and Savings Plans – Two Types of 529 College Plans
I am not familiar with 529 college plans. But if you are one who is relevant to college education, you should know that one of the smartest ways to save for college is through a 529 plan. 529 college plans are state plans and all of them have differences in their features, which is designed to encourage saving for the college education of a tax payer’s designated beneficiary.
But have you heard that there are actually two types of 529 college plans? Yes, 529 plans are usually categorized as either prepaid or savings plans.
A prepaid plan (or called a Prepaid Tuition Plan) that basically allows a person to pre-purchase a tuition fee at the current tuition rates that later on will be paid out when the designated beneficiary goes to college and start enrollment. This first type can be administered by either states or colleges themselves.
However, a savings plan can only be administered by the state. Account earnings in this type of plan are based on the performance of your current underlying investments; which typically, are your mutual funds. The plan will offer you several investment options from which to choose. Your account will go up or down in value based on the performance of the particular option you select. Currently, Washington D.C. and 49 other states offer the Savings Plan. This type of plan offer a variety of age based options for investment wherein your underlying investment increases as your designated beneficiary gets closer to the time he or she enters college.
In fact, for educational institutions, they can only offer a 529 prepaid plan but not a 529 savings plan. Of course, with the help of the 529 college plan, saving and paying for college has never been easier.