Should I Use a 529 Savings Account or a Prepaid Tuition Plan?

published 31 August 2011

Editor’s note: This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance. Use the drop-down menu above to consider other financial conundrums and the right answers for you; share your own experiences and insights in the Discuss field at the bottom of this page.

Use a 529 savings plan if you have plenty of time in which to save, your student has no idea where he or she will attend college, you expect the plan’s performance to outpace tuition inflation, and you can tolerate risk in the early years to get higher returns. You may also get a state tax deduction for contributions.

Prepay tuition with a state plan if your student plans to stay in state and you like knowing that tuition is covered. Prepaid plans let you lock in tuition at your state’s schools years ahead of time. If your student ends up going to a private school or a school out of state, you can transfer the money or get a refund, but it may not equal the price of the other school.