college

College savings for adults

Money invested in state-run, prepaid plans can only be used to buy credits at public colleges or universities in that state. Funds invested in the Independent 529 Plan can only be used at the plan's 274 member schools.

In both cases, the money is sent directly from the 529 plan to the higher-ed institution without passing through the plan holder's hands and can't be used for any educational expense except for tuition.

Because of restrictions on where and when the money can be cashed in, prepaid plans work best for adults who know they'll be attending a public in-state institution and who are planning for school a few years beforehand.

Kantrowitz of Finaid.org says an alternative option for adult students who want to return to school soon is to invest in a prepaid plan today, take out federal loans to cover the first two years of school and cash in on prepaid credits during the second half of their college tenure.

Since tuition inflation often outpaces the 6.8 percent fixed interest rate from the Stafford Loan program -- the largest federal student-loan source -- students can get the biggest bang for their buck by leaving their money in a prepaid plan for as long as possible.

Despite the restrictions, Tanabe says prepaid plans can be a better investment for adults who have a clear view of their college path. With today's market conditions, prepaid programs are providing better returns than college savings plans.

"With the economic turmoil that we're seeing, the guaranteed return is a comfort," Tanabe says.

3. 529 college savings plans allow broad college selection 

Kalman Chany says not to fear 529 college savings plans but to approach them with caution, if you're looking for a greater choice of colleges. Chany is president of the New York City-based financial aid consulting firm Campus Consultants Inc. and author of "Paying for College without Going Broke."

"With the volatility we've seen in the markets, it's just too risky to invest in stocks and equities right now," Chany explains. "529 saving plans offer different options you can put your money into, and many of them ... don't involve equities at all. People who do that get the kicker of tax benefits without the risk."

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Offered through every state and the District of Columbia, 529 college savings plans come with the same federal and state tax advantages as prepaid plans. But students can choose from any accredited 2- or 4-year institution in the country. And they can be used for any qualified educational expense, such as books and room and board -- not just tuition.

Though 529 college savings plans aren't entirely risk-free investments, most plans, such as the Virginia Education Savings Trust, offer conservative bond and money-market investment options, giving short-term savers the tax advantages with limited risk.

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