What most parents don't know about saving for college

About 70 percent of the respondents to a recent survey didn’t know what a 529 Plan was, or how it works as a college savings tool. Given the high cost of a college education and the daunting task of paying for it, this is a little alarming.

What are 529 plans?

A 529 Plan awareness survey by the investment firm Edward Jones found most parents didn’t know how these plans work. A 529 plans is a tax-advantaged savings plan that is sponsored by states and sometimes co-sponsored by financial institutions. There are two types of plans: A pre-paid tuition plan and a college saving plan.

Pre-paid tuition plans are set up so savers can purchase units or credits at participating colleges and universities. The idea is that you are buying tuition – and sometimes even room and board – ahead of time. Most of these plans are sponsored by state governments, and have residency requirements.

College savings plans

College savings plans are usually set up by parents (as account holders) to pay for a child’s college expenses by naming that child as beneficiary. These plans allow parents to select a range of investment options, including stocks and mutual funds. Students aren’t limited in the way they use the saved funds and withdrawals from college savings plans can be used at any college or university.

What’s best about pre-paid tuition plans is that they lock in the price of tuition at eligible schools. The college savings plans, however, give you more flexibility in how you save your money and in what schools you can choose from.

Savings Accounts