A prepaid tuition plan enables the investor to purchase tuition credits at current rates that are then used when the beneficiary attends a participating college. All plans cover tuition and mandatory fees only. Some plans allow purchase of room and board or use excess tuition credits for other qualified expenses.

Most prepayment plans are sponsored by individual states and apply to the public institutions in the state. Some state plans cover both public and private institutions. The Independent 529 prepaid tuition plan includes more than 200 participating private institutions nationwide. In the case of state plans, either the investor or beneficiary must live in the sponsoring state.

There is no income tax on any appreciation in the value of the tuition credits if they are used to offset tuition. It may be possible to transfer the face value of the credits to a nonparticipating school if the beneficiary does not attend a participating one. Some states and independent plans actually guarantee that credits will cover prepaid costs.

A key potential benefit of prepaid tuition plans is they tend to act as a hedge against economic downturns. During recessions and for a year or two afterward, state governments tend to reduce support for higher education. This shift translates directly into increases in public college tuition rates. When other investments fall in a declining stock market, prepaid tuition plans tend to gain value.

Prepaid tuition plans do not guarantee admission into college. Most plans have an age and grade limit for the beneficiary.

If the beneficiary of an account does not attend college, the account owner may name another beneficiary for the account. This beneficiary must be a family member. Otherwise, if the funds are withdrawn for a purpose other than to pay for qualified higher education expenses (except on account of a beneficiary's death or disability), they are treated as a taxed withdrawal with an additional 10% federal penalty on the earnings of the account at the owner's tax rate.

If a beneficiary dies, another family member can be named, or a withdrawal can be made with the earnings portion subject to federal income tax without the 10% additional federal penalty.

If the beneficiary receives a scholarship or grant that covers expenses, funds can be withdrawn tax-free up to the amount of the scholarship without penalty. If more money is taken out, a 10% penalty applies.

Repayment of student loans is not considered a qualified higher education expense for use with 529 and other education savings plans.

http://www.collegesavings.org />

http://www.savingforcollege.com

http://www.irs.gov/pub/irs-pdf/p970.pdf

http://www.sec.gov/investor/pubs/intro529.htm