FAQ On College Savings Plans

Are prepaid tuition plans and college savings plans different?
Yes. With a prepaid tuition plan, parents, grandparents, and others essentially "lock in" today's tuition rates, and the program will pay out future college tuition at any of the state's eligible colleges or universities (or a payment to private and out-of-state institutions). A college savings plan is an investment program that allows participants to invest in a special account designated for qualified higher education expenses. In general, college savings plans offer a rate of return that depends on the performance of the plan's investments. As such, the value of a college savings plan account may increase or decrease over time.

How much can be contributed to a 529 plan?
Each state sets its own contribution limit under federal regulations. For a prepaid tuition plan, the maximum contribution is the amount necessary to prepay the number of years or units of tuition offered by the state. This amount will vary from state to state. A majority of states with college savings plans have maximum contribution limits of more than $200,000. These limits also may be adjusted annually for inflation. In 2007, individuals can contribute up to $60,000 in one year for each beneficiary - or $120,000 from married couples - without incurring federal gift taxes, as long as no further gifts to or for that individual are made during the next five years.

Who can contribute to 529 plans?
Generally an account holder can open an account on behalf of any student or potential student. For example, grandparents can save on behalf of grandchildren. Even someone who is not a family member can open a 529 plan account for an unrelated child or adult.