If you’ve researched college savings plans, you’ve likely come across the 529 savings plan. All 50 states sponsor this plan, which IRS codes authorize by Section 529. What you may not know is that two plans fall under the 529 umbrella – a college savings plan and a prepaid tuition plan. Learning the differences between these two plans, and the pros and cons of each, can help you make the right decision for the future.

529 College Savings Plan

The 529 college savings plan permits the account holder, or the person doing the saving, to establish an account for a beneficiary, or the student. The purpose of the college savings plan is to pay the student’s eligible college expenses when he or she attends school. The account holder has several investment options for monetary contributions to the savings plan, including stocks, bonds, money market funds, and age-based portfolios.

A portfolio is often a wise investment choice as it automatically adjusts toward more conservative investments as the student gets closer to college age. It’s important to note that college savings plans that invest in mutual funds do not get the protection of federal insurance or state government guarantees. The college savings plan does not lock college tuition prices at eligible public and private schools. There is also no age limit on this type of plan – it is open to adults and children of all ages.

There is no limit on the enrollment period, meaning an account holder can enroll year round. This plan does not require residency although, in some cases, you must purchase a 529 college savings plan through a broker or financial advisor if you’re out of state. Most college savings plans have contribution limits, typically more than $200,000. Finally, this type of plan covers all higher-education expenses that qualify, such as tuition, room and board, books and equipment, and mandatory fees.

529 Prepaid Tuition Plan

Only 11 states give parents the option to invest in the 529 prepaid tuition plan: Florida, Illinois, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, Virginia, and Washington. Prepaid accounts differ from traditional accounts in that parents – the account holders – purchase tuition credits that will cover a child’s future tuition at current rates. Prepaid plans lock tuition prices at eligible schools at their present rates, giving parents an advantage in the event of future tuition price hikes.

While it can boast a price advantage, the 529 prepaid tuition plan has stipulations some families may find disadvantageous. For example, this plan only allows parents to pay for the price of tuition and mandatory fees – not all higher-education expenses like the traditional plan allows. Furthermore, most plans set installment payment plans (or lump sum plans) prior to purchase based on the age of the beneficiary. This can limit some parents’ contributions to the plan. There are also age and grade limits for beneficiaries, state residency requirements, and limited enrollment periods. However, most prepaid tuition plans are backed by the state.

Which Savings Plan is Right for You?

Both plans come with tax advantages and other potential incentives designed to make it easier for parents to save money for a child’s higher education. Knowing which 529 college savings plan is right for your beneficiary requires additional research and often a meeting with a college planning specialist.

Working with an experienced 529 savings plan specialist can help you select the option that works best for you, your family, and your child. College Benefits Research Group (CBRG) can help you make a more informed decision before you open a 529 account, giving you the critical information and benefits/drawbacks of each.

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