* Prepaid Tuition Plans: These plans allow you to lock in tuition rates *today* for future college education. You essentially pre-pay for college at today's prices, shielding yourself from future tuition increases. However, they are often limited to public colleges in the state offering the plan, and may not cover all college expenses (room, board, books, etc.). They also carry risk if the plan itself runs into financial trouble.
* College Savings Plans (529 Plans): These plans are investment accounts where you contribute money that grows tax-deferred. The earnings are tax-free when used for qualified education expenses (tuition, fees, room and board, etc.). You have more flexibility in choosing investments within the plan (stocks, bonds, etc.), allowing you to potentially earn more (but also risk losing more) than with a prepaid plan. They are generally more portable, meaning you can use them at most accredited colleges and universities, regardless of location.
Here's a table summarizing the key differences:
| Feature | Prepaid Tuition Plan | College Savings Plan (529 Plan) |
|-----------------|----------------------------------------------------|--------------------------------------------------------|
| Mechanism | Pre-pays for future tuition at current rates | Invests money to grow for future education expenses |
| Risk | Lower potential return, risk of plan insolvency | Higher potential return, but also higher potential loss |
| Flexibility | Less flexible, often limited to in-state schools | More flexible, usable at most accredited colleges |
| Expense Coverage | Typically covers tuition only; may not cover fees, room & board | Can cover tuition, fees, room & board, books, etc. |
| Growth | No investment growth, locked-in tuition cost | Potential for investment growth (tax-advantaged) |
Ultimately, the best choice depends on your risk tolerance, financial situation, and your child's future college plans. Consider factors like your state's prepaid plan offerings, your investment timeline, and your comfort level with market risk when making your decision.