With the annual cost of a private college education in 2006-07 in the U.S. averaging $30,367, including tuition, room and board, and $12,797 at a public university, according to the College Board, many grandparents are exploring ways to help their grandchildren pay for the escalating cost of higher education. One of the easiest ways to offset college costs and reap tax benefits involves opening a 529 college savings plan.

IRA holders who have turned 70½ years old are required to withdraw money from their IRAs, called the required minimum distribution. If they don't need all of this money to live on, they could start a 529 college savings plan for their grandchildren, says Jeff Coghan, director of Smart529 college savings at The Hartford insurance company in Simsbury, Conn. "That way the money stays tax-deferred," he says.

The Internal Revenue Service code authorized 529 college savings plans in 1997, with the states granted the right to determine their own plans. Hence, every state has its own 529 college savings plan, which offers different minimum and maximum deposits and tax benefits. In fact, maximum contributions in 529s range from $218,535 (Louisiana) to $344,000 (Pennsylvania) with a median of $235,000, says Mark Kantrowitz, publisher of FinAid.Org, a Web site dedicated to student financial aid. 

"Financial-aid administrators encourage anyone who can to invest in a 529 plan. The more financial resources students have, the more options they have for their educational pursuits," says Marty Guthrie, the director of governmental affairs at the National Association of Student Financial Aid Administrators, or NASFAA, based in Washington, D.C.

The 529 college savings plans are "a way of giving money to the child that ensures it will be spent on education," Kantrowitz says. If grandparents give money to a grandchild as a gift, it can be diverted to other items such as a car or a vacation.

Do the homework
Guthrie recommends that anyone who is considering opening a 529 use Web sites such as collegesavings.org and savingforcollege.com, which offer state-by-state descriptions and portfolio returns of each plan. Analyzing results can be complicated because plans include adviser-sold plans with sales charges and plans without sales charges, and returns vary greatly. For example, West Virginia Cornerstone Smart 529 Aggressive Growth had the highest returns of all plans with sales charges, 11.77 percent over the past three years as of Dec. 31, 2006, while West Virginia Director Smart 529 Stable Value returned only 0.87 percent.