Many suggestions fly around when it is finally time to make the decision to start saving for college. Often times the money is placed in a normal savings account and is left to earn less than .5% interest per month. Others are a bit wiser and put their money in a higher performing savings account or money market fund earning just north of 3% per month. Still others prefer to be a bit more long term in their investments and place the money in CD’s earning them a decent 5% over a few years time. While these are all logical and certianly save options for your money, another plan exists which will earn you a decent return on your saved money - and receive certain tax advantages. This is the 529 college savings plan.

Most of the time, financial things are difficult to understand. At times I wonder if the lack of financial literacy was an intentional goal of the major banks, but I digress. I will break the 529 savings plan down, and hopefully make it a bit more understandable, and hopefully you will consider it as a viable option as you continue to save for either your own future, or that of your children.

The 529 savings plan is an special investment program created by the United States government to encourage college savings.

Investing in a 529 College Savings plan carries with it many advantages.  Many of the 529 benefits come from investing in 529 plans located in your home state.  Depending on the state of residence, returns earned from the savings plan may be completely tax-free, and monies allocated to the savings plan may also be tax-deductible from state income taxes .  Some states also provide matching programs as well as scholarship programs and other financial aid incentives for those who choose to invest in a 529.

The PrePaid 529. There are two types of 529 college savings plans. The prepaid 529 allows the saver to pre-buy tuition. Tuition is purchased at the current rate, to be used at a future date. By the time the student gets to school, it is assumed that inflation will have driven the price up even more - making pre-paid tuition a good value. For example, if college cost $1 per year in 2000 and I invested in a prepaid 529. Now, in ten years college costs $5 per year, but because I prepaid - it only ended up really costing me $1 - saving me $4.

The Savings 529. The savings 529 is more of a traditional savings program. The money saved into the 529 is generally invested in things like mutual funds which generally turn out steady and reliable returns.

Once money goes into a 529, it can only come out for specific purposes.  Don’t expect to cash in your 529 for a new car…Instead, the 529 can only be used on expenses related to college education such as tuition, books, supplies, room and board, and any other equipment required for study.  529 plans can not be used to pay down school loans, or interest on school loans.

That is the 529 college savings plan in a nutshell and a half.  They certainly do have their advantages, however I should caution that it is still possible to lose money in a 529 because it is an investment, and all investments include risks.  As always it is best to consult with a financial professional before making decisions involving significant amounts of money.  To do a little bit more reading on 529 plans check out what the SEC has to offer regarding 529 savings plans.