529 College Savings Plan Options to Fund Secondary Education

Not all Section 529 college savings plans are alike. Some 529 plans allow only residents of their states to participate, while others open their plans up to everyone. There’s an even larger difference in plan types, however.

Original 529 plans were all done on the basis of prepaying tuition; the more common savings plan (which is what most people think of when they think of 529 plans) is a later addition, designed for greater flexibility, but perhaps more risk.

Here is a rundown of your 529 College Savings Plan options:

  • Prepaid tuition plans administered by the states: Prepaid tuition plans, as the name suggests, are just that: the purchase of tuition to a particular school or group of schools ahead of when your student will attend. The state or a particular school may administer them.

  • Prepaid tuition plans administered by educational institutions: If you know for certain and beyond any reasonable doubt that your child or grandchild is going to attend a certain school in the future (your alma mater, perhaps, because you’ve already donated the field house and the science lab?), an institutional prepaid tuition plan may be just the ticket for you.

  • Savings plans: Savings plans are probably what comes to mind when you think of 529 plans. The Section 529 savings plan option broke open the world of college savings, offering truly huge tax advantages to the wealthy and the not so wealthy.

  • Guaranteed savings plans: Although all Section 529 plans are created equal under the terms of Section 529 of the Internal Revenue Code, clearly the states don’t agree with that, severely limiting the size of traditional prepaid tuition plans in comparison to savings plans.

    Also, the U.S. Department of Education hasn’t figured out that it should treat plans the same. Instead it gives preferential treatment to savings plans while determining that distributions from prepaid tuition plans are a financial resource that reduces need on a dollar-for-dollar basis, thereby limiting financial aid packages and the awards of outright, need-based grants.

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