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Save money while saving for your child's education
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More than a dozen states currently offer prepaid tuition programs. Recently, many private colleges, including the most prestigious, launched their own prepaid tuition program, Independent 529 Plan. Currently there are 240 participating private colleges, according to Independent 529 plan.org.

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There's a good chance we'll see more private prepaid tuition programs offered in the future. The tax law allows private colleges and universities to develop their own prepaid tuition plans.

With a savings plan, parents open an account and choose an investment strategy. They make withdrawals when it's time to pay a son or daughter's college expenses including tuition, books, and room and board.

"It's essentially a 401(k) dedicated to paying for college expenses," Hunter says.

Loosening the requisites
Money from a state-sponsored college savings plan can be used to pay for educational expenses at any accredited college or university.

"There's a lot more flexibility built into the savings programs -- fewer restrictions," Joyce says. "You can be a Maryland resident and use those savings to attend a school in California."

Each savings program offers parents several different investment choices. Because many state programs are open to nonresidents, it makes sense for parents to shop around for a plan that best meets their financial and educational needs.

"Most savings programs are open to nonresidents so you can shop the different states to see what you fancy," Hurley says.

"You can find pretty much anything you want in a 529 plan that you can get on the outside in the stock and bond market."

A popular type of college savings plan begins with some aggressive investments and grows more conservative as the potential college student grows up.

"It automatically adjusts over time to a more conservative allocation," Hurley says. "It's kind of an autopilot college savings program."

Thanks to the recessed economy, many parents will have to scramble to meet college costs. A parent invested in an age-based college savings plan can breathe a bit easier.

"The ones who were hard hit were the ones with young children and they have time to recover," Hurley says. "The ones with older children were protected effectively."

Alternative uses of 529s
Speaking of protection, what happens if a potential college student decides not to go to college?

A parent has three basic choices: hang on to the savings plan, transfer it to another family member or cash out and pay a penalty.

Some parents hang on to the 529 plan in case the child decides to attend university at a later date. Others transfer the account over to another family member.

Some parents decide to cash out the plan and pay a penalty. Most states collect a penalty of 10 percent of the earnings on any withdrawal that is used for non-educational purposes.

A federal penalty equal to 10 percent of earnings will be charged as well. No penalty will be assessed if a beneficiary should die or become disabled.

While the tax-free withdrawals clearly make 529 plans attractive financial options, they may not be right for every family. The reason? Participating in a 529 plan affects a family's eligibility for financial aid.

 
 
Next: "Financial aid often dwarfs tax savings. ..."
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