Section 529 plans come in two types, allowing taxpayers to either save funds in a tax-free account to be used later for eligible education costs, or to prepay tuition for qualified universities.

Allow taxpayers to contribute after-tax dollars that are invested in some sort of savings vehicle – typically mutual funds. Many of these plans offer stock funds when a child is quite young, which will then be transferred to more conservative investments (like bond funds) as the child gets closer to college age. As with any investment, there are no guarantees of growth and the plans are subject to the normal investment risks, even though state governments sponsor them. A big plus for these plans is they are not geared towards in-state schools or a specific institution, but meant to be applied to whichever school a child chooses to attend

As the name implies, a Prepaid Tuition Plan allows parents to pay for future college education at today’s tuition rates. By locking in the tuition payments, worries about the increase of tuition costs in the future can be set aside. This gives the assurance that the child will have the money to attend college when that time comes. These plans sound very attractive; however, most of these plans guarantee that the taxpayer will be covered only if their child chooses to go to a public in-state college or university. Therefore, if the taxpayer’s child decides to attend an out-of-state school, the taxpayer won’t be fully covered, simply because these plans are not meant to fund the higher costs of private or out-of-state education. However, prepaid tuition programs can be established and maintained by educational institutions, including private institutions.