529 plans, named after Section 529 of the Internal Revenue Code, are tax-advantaged savings plans designed for those saving for college, either for themselves or for their children. There are two types of plans: pre-paid tuition plans and college savings plans. All 50 states sponsor at least one type of plan.

Pre-paid tuition plans allow those saving for college to purchase credits for future enrollment, usually at the tuition rate at the time they enter the plan. These are generally paid for on an installment basis over several years. Most of these plans are state run and have residency or other requirements.

College savings plans allow those saving for college to set up an investment account in order to pay tuition and any other educational expenses. Like a 401(k), college savings plans usually offer a number of alternatives for how the saver would like their money invested: stock mutual funds, bond mutual funds, and money market funds are common. Note that investments in mutual funds are not guaranteed by the states and cannot be insured.

Any money earned in either plan is exempt from Federal income tax, and often from state taxes, as long as the money is used solely for educational expenses. If the money is used for another purpose, it is subject to the usual taxes plus a 10 percent penalty. Although there can be fees involved in setting up such a plan, some are available directly from the states without the need of going through a broker.

There are several major differences between prepaid tuition plans and college savings plans.

Prepaid tuition plans are generally insured by the state; college savings plans, because they represent a personal investment with market risk, are not.

Prepaid tuition plans lock in tuition prices the year they are set up; college savings plans do not.

Prepaid tuition plans can only be used for tuition and mandatory fees, though some states allow room and board, as well; college savings plans can be applied to all "qualified higher education expenses", including room and board, books, and equipment such as computers.

Most prepaid tuition plans have an age/grade limit; many college savings plans have contribution limits that often exceed $200,000.

Most states providing prepaid tuition plans enforce a residency requirement; college savings plans have none, though residency may limit the ways in which the plan can be set up.

It’s also worth noting that both plans, since they are considered part of the parents’ assets when calculating need, can reduce a student’s eligibility for financial aid, . As always, it’s best to study the advantages and disadvantages of whatever plans are available before making a decision.