Smart College Savings

Independent 529 Plans

Yes, although carrying the same 529 flag, a prepaid 529 plan is very different from the more popular 529 savings plan.

Most investments don't come with a guarantee. But a college-savings account called the Independent 529 plan offers an enticing promise: Hand over money now, and you can pay today's private-school tuition rates at 257 institutions for tomorrow's students, even those who won't use the money for as many as 30 years, including unborn children.

Sound good so far? There's at least one big catch -- the I529 works at Stanford and Princeton but not Harvard or Yale. Rice and Vanderbilt participate, but not Cornell or Georgetown.

This odd state of affairs is par for the course in the confusing world of college-savings accounts known as 529 plans. A short primer: Almost every state offers a 529 plan, some have several and there are two basic types. "Savings" accounts generally give you a choice of mutual funds; when the time comes, you cash out and pay tuition anywhere your kid wants to go. State "prepaid" accounts allow you to pay today's prices (or a slight premium) for use later, though usually only at state schools.

The three-year-old I529 is a prepaid plan, but it's run by the schools that participate (and managed by financial-services giant TIAA-CREF). The plan has gained new traction recently. Last month President Bush signed a bill that makes all investment gains in 529 accounts permanently free of federal taxes, as long as withdrawals are used for higher-education expenses. Earlier this year, another bill made prepaid 529 plans more attractive in terms of how they are considered in the federal financial-aid eligibility calculation.