Federal and State Government Aid

Federal loans like the Stafford, Perkins and PLUS loans are only a few of the many ways with which the government tries to help finance the postsecondary education of its citizens. These provisions are actually mandated by legislation and are immutable until the law is amended.

Because investments in either Prepaid Tuition or College Savings are often exempt from federal, state or local income taxes - it has been named after Section 529 of the Internal Revenue Code that defines exemptions from income taxes. Moreover, this feature serves to encourage contributing to the plans for the children and increase the financial provisions for their postsecondary education.

While all states have the Section 529 provision, only seventeen states offer both types of plans, thirty-two offer only the College Savings Plans while two states offer Prepaid Tuition Plans only. In a nutshell, these two provisions are only applicable at in-state public colleges. However, there are about a hundred other private colleges that offer a national tuition plan and they call it the Independent Section 529.

Prepaid Tuition Plan

Beginning with a college savings plan, this program guarantees that the savings will increase in value as the rates of college tuition increases. For example, if your mother bought a share of half a year's tuition, then it will still be worth half a year's tuition. Even after twenty years, even if the tuition fees have doubled, your college savings plan will still provide you with half a year's worth of education. In simple terms, parents are able to lock in the tuition of their children at a specific value, regardless of inflation.

These plans are executed by state governments and some states have been innovating by separating plans for two and four years of college and by including provisions for room and board. If the student attends an in-state public college, then the plan pays the tuition 100%. If the student enrols at a private institution on a prepaid tuition plan, then it will only pay what is the average of the in-state public college tuition - the rest must be paid by the family.

Most plans require that the recipient or the owner be residents of the state where the account will be opened in. However, anybody can contribute to a college tuition plan, even non-relatives but they are quite ideal for grandparents due to the estate planning features. Also, these plans are exempt from federal income tax and often from state and local income taxes as well. Moreover, if the beneficiary dies then the plan can easily be transferred to another member of the family.

College Savings Plan

Unlike the secure guarantee of the Prepaid Tuition Plan, the College Savings Plan is subject to market forces but while the risk is great, the chances of reaping more is possible. This savings plan offers an "adaptive asset allocation strategy" based on the child's age. Generally, it will be aggressive in the early years of the child in order to maximize possible profits or have time to regain losses in the future. These plans also range from risk-based assets from 100% equity to more conservative approaches.

Take note that only the account owner has access to the money, not the child but anyone can contribute to the account. Even complete strangers may contribute to the account but federal laws require that there must be a limit to the contributions. But in comparison with the prepaid tuition plans, the college savings plan has a higher contribution limit.

If you cancel the account, the law requires that federal income taxes be deducted from the earnings plus a 10% tax penalty. In cases of death, disability or receipt of scholarship the owner has the option of changing the account beneficiary in order to avoid paying the income tax on the earnings.