College Savings 101

By Barbara Kiviat

The state-sponsored college-savings accounts known as 529 plans doubled in size last year, and now hold $26 billion in assets. No wonder the programs are popular--over the past decade, tuition has risen 38%, and cash-strapped parents are looking for ways to save. Public colleges saw a 10% jump in tuition last year alone.

The 529s are generally a good deal, letting investment earnings grow and be spent, free of federal tax, for undergraduate or graduate tuition, room and board or books and supplies. But with so much money flowing into 529s, the market has been flooded with more than 80 programs. How to select the right one for your needs? Some guidelines:

**LOOK AT YOUR STATE'S PLANS FIRST 529s often give state-tax breaks to residents. A handful of states--Illinois, Pennsylvania, Tennessee--exempt only their own plans from state tax.

**FIND INVESTMENT OPTIONS YOU LIKE 529s typically invest your money in mutual funds that you pick, either directly or through pregrouped portfolios. Look for a plan with a broad range of funds that have performed well against similar types of funds. SavingForCollege.com contains a database of 529 plans, as does the college-savings link at Morningstar.com

**FEES MATTER Most 529 plans are sold through financial advisers. Such plans charge a one-time sales load of as much as 5.75% of money invested, which you may think a fair trade for good advice. But a high annual expense ratio--charged by all plans, even those you buy direct--will only eat at returns. Plans charge as little as 0.65% annually; the average is 1.33%.

**YOUR EMPLOYER'S 529 MAY NOT BE RIGHT FOR YOU Most workplaces offer only one plan, so shop around.

**CONSIDER A COVERDELL ACCOUNT TOO It gives the same federal-tax breaks and entry into almost any mutual fund without an added layer of fees, though you can put away only $2,000 a year and wealthy contributors are excluded. --By Barbara Kiviat

You can reach Barbara at barbara_kiviat@timemagazine.com