The switch from summer to fall routines often is accompanied by children's thin wails of "Is it back-to-school already?" This plaintive question often is rendered at a pitch that only a mother can hear. While most of us carry the same disbelief as our children about how quickly summer flies by us, the time is always ripe to consider how we might pay for our children's future education. The question arises whether it's best to invest in a Section 529 plan to pay for college expenses, or to invest in some other option.

Why would you want to save as early as possible for your child's post-secondary education? According to the College Board, the cost of education has risen about twice as fast as the Consumer Price Index since 1980. According to the U.S. Department of Education, public college tuition and fees have increased by 51% within the past decade. During the same period, median family income increased by only 9%. If you hope for federal financial aid to help your children, don't count on grants from the feds, as this source has shifted largely to loans.

Therefore, saving for college is an investment strategy that combines a number of possibilities. In fact, you might consider college investments as you do your portfolio?diversify and think long-term. Since the federal government has backed away from grants, this institution - along with your state government - has instigated several options for college investment opportunities.

Congress sanctioned Section 529 investment strategies in 1996 as a means to complement already-existing prepaid tuition plans offered by many states. The 529 allows any individual to "sponsor" a child's college education through institutions linked to a resident's state. Additionally, almost 300 private colleges and universities offer a prepaid tuition program entitled the "Independent 529 Plan," which allows investors to purchase discounted tuition at any one of the institutions that participates in this program.*

Almost every state (50 to date) has linked to a financial institution to offer Section 529 plans, and each state maintains its own enrollment procedures and vehicles for investment. By the end of 2003, 97% of 529 accounts were invested in mutual funds, but each state's plan usually offers more than one investment option. Section 529 investment plans have some advantages and a few drawbacks:

• Advantage: 529 plans provide convenience. The money in a Section 529 investment plan can be used for college expenses at any accredited college in any state. Additionally, 529 assets can easily be transferred between family beneficiaries. If one child doesn't use the money for college, you can designate another recipient -- a cousin, or a niece or nephew. Grandparents who set up the plans can switch the money between grandchildren. Or you could set up your own plan and later transfer the assets to your child. Even non-relatives can contribute or set up their own plan to help a child from another family; however, to avoid penalty and income tax, the new beneficiary must be a member of the family of the original beneficiary.
  
  
• Disadvantage: 529 plans offer little control over investment possibilities. There are no income limitations on a person's ability to contribute to an account other than the life-time maximums each state designate for its program; however, federal law prohibits the investor from having direct control over the selection of specific investments. As an alternative, state and the investment managers typically offer a large number of savings options for the investor to choose from when they open an account.
  
  
• Advantage: 529 plans offer flexibility. If you want to move to another state, rollovers generally are allowed. According to the College Savings Plans Network, rollovers into another 529 plan generally are allowed as well. So, if the beneficiary of the account decides not to attend a post-secondary institution, the account owner can transfer funds in the account to another eligible beneficiary in most cases.
  
  
• Disadvantage: 529 plans vary from state to state and from investor to investor. If you move from one state to another, you must reconsider how your 529 investments are affected. Additionally, you may find that you will be eligible for specific state tax incentives by being recognized as the account owner, even if you are unrelated to the child who will receive the savings that you accrue. If you live in a high tax state such as New York, you'll also want to check tax advantages as compared to other states. If the tax breaks aren't there, you might want to consider other options.
  
  
• Advantage: 529 plans offer more control than using investment strategies like the Uniform Gifts to Minors Act (UGMA). You may save and save, but if you offer a child money through the UGMA when your child reaches the age of maturity (18 in some states, 21 in others), he or she might use the money for anything other than their education and there's not much you can do about it. However, the 529 plan puts the controls back in the owner's hands until they are distributed for college expenses. One drawback includes the 529 owner who decides that he or she wants the money for plans other than a child's college education, as the account owner can withdraw all the funds in an account at any time for personal use.

Next week I'll compare the Section 529 further to UGMA and prepaid college tuition plans. In the meantime, you might look for a swimsuit on sale for next summer?after all, one way to determine the proximity of back-to-school season for any locale is to find summer sales alongside those notebooks and pencils that you purchase for little Bobby and Barbara.

Until Next Week,
Linda Goin

* This information was gathered from an online PDF brochure entitled, "Saving for Education: A Long-Term Investment Guide to Understanding the 529," offered by the Investment Company Institute, printed in 2005.

** In 1991, the College Savings Plans Network formed as an affiliate to the National Association of State Treasurers. Intended to make higher education more attainable, the Network serves as a clearinghouse for information among existing college savings programs. Additionally, CSPN monitors federal activities and promotes legislation that will positively affect state programs. You can find information in your state usually directly from the state treasurer's office.