State tuition plans

More than likely, your state sponsors a college savings plan, sometimes called "Section 529" Plans, after the portion of the IRS code that authorizes these accounts. Each state determines the maximum amount you may contribute annually per child.

 

Advantages

• Savings are not subject to state and local taxes.
• Taxes on the interest will be deferred until your child goes to school.
• Interest is taxed based on your child's lower tax bracket.

 

Disadvantages

• Not eligible for federal tax deductions.
• Some states may assess penalties if your child attends an out-of-state school.
• Some states pay low interest rates.

 

Prepaid tuition plans

If your child plans to attend an in-state school, a prepaid tuition plan may be a good option. Low risk and tax advantaged, these programs allow you to lock in tuition at the current rate. Under this plan, your state promises the amount you set aside will buy the same amount of tuition at a state school in the future. Keep in mind:

• Many plans may be used only at in-state public schools.
• Only a few states extend these plans to selected in-state private schools.
• The potential rate of return on other investments—such as mutual funds—may exceed future tuition increases.