More than likely, your state sponsors a college savings plan. They are often called "529 plans," after the section of the IRS tax code that authorizes them. Each state determines the maximum amount you may contribute annually per child

It is important to understand the key benefits of 529 plans and how they compare to other college savings plans, as well as learn the impact of 529 plans on student financial aid and scholarships.

529 plans are one of the best ways for families to save for college. While other savings options, such as Coverdell Education Savings Accounts and the Uniform Gifts to Minors Act (UGMAs), are also available, 529 plans should be considered by any family with children and income available for savings.

What are the main benefits?
Contributions in most 529 plans grow entirely tax free, meaning no capital gains taxes are paid. About half of states offer tax deductions on contributions in their 529 plans.

Who can contribute?
Anyone (regardless of income) can contribute, whether the 529 plan is for their child or that of friend or family member.

What is the difference between prepaid plans and savings plans?

• 529 prepaid plans are contracts that you purchase to lock in today's tuition rate at public and some private colleges in a particular state. Restrictions apply when using funds in 529 prepaid plans for out-of-state colleges and the impact on financial aid is worse than if you invest in 529 savings plans.
• 529 savings plans are made up of mutual funds that grow tax free and can be used for any qualified higher education expenses, such as tuition, room and board, and miscellaneous college expenses.

What is the minimum and maximum investment?
You can invest as little as $25 to open a 529 plan and invest over $300,000 per beneficiary. You cannot invest the $300,000 as a lump sum.

What options do I have?
There are now over 900 different investment options, with many well-known fund managers such as Fidelity, AllianceBernstein, American Funds, Vanguard, and Merrill Lynch. Plus, there are numerous 529 plans—over 80 from which to choose.

What costs are associated with investing?
529 plan costs range from 0%–2.5% of your assets per year, plus front- and/or back-end sales fees if you buy plans through brokers. If you have $100,000 invested and the expense ratio is 1.5%, you pay $1,500 that year.

This is a standard practice in the mutual fund industry. The states that govern the plans and the fund managers are compensated for administering the plan and managing your money.

Selecting plans with lower expense ratios is generally a smart strategy, although how a plan performs also affects whether your money grows rapidly or not.

How do rebate programs work with 529 plans?
Rebate and tuition discount programs like Upromise offer parents "kick-backs" of 1-10% on purchases made with affiliated retailers. These rebates may be invested in specific 529 plans.

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