Prepaid are exactly how they sound – if you open a prepaid tuition plan, you can lock in the current costs of tuition in place of future prices, which generally rise every year. There are pro’s & con’s to this plan, but if locking in current tertiary tuitions appeals, then a great source of information on these plans can be found here.

 The Savings Plan is exactly that; an account that is capital gains tax exempt where most expenses associated with tertiary education can be paid with these funds.

College savings investment plans have grown in popularity during the past few years, while several prepaid tuition plans have stopped accepting new enrollees or shut down entirely. The decreased popularity of prepaid plans may be due in part to some particular drawbacks. For example, money put into a state-run prepaid plan may only be applied to tuition and fees at in-state public colleges and universities. Room, board, books and other expenses aren't included and must be covered separately.

Why not just save for college in a standard old savings account? For one, interest rates.  Have you had a look at your bank’s savings account rates lately? Don’t expect much in the way of growth over the ensuing years.

By far the biggest perk of a 529 plan is the tax advantage (see above). The money you earn from investing in the plan isn’t federally taxed and as the IRS explains, “generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board,”.

This means your money can grow tax-free. However, contributions to a 529 plan aren’t deductible in California. This basically means you can’t deduct the amount you save in a 529 from your taxable income, the way you can with, say, a 401(k) or a traditional Individual Retirement Account. But this also means that when you take money out of the 529 plan, you don’t have to pay taxes.

Since 529 plans are state-sponsored, you don’t set them up the same way you would other investment accounts. Almost all states have totally different 529 plans and some states have a few options to choose from.

The Wall Street Journal further explains:

“Each state picks a single administrator, like Vanguard, to run its plan and handle accounts for investors. These investment managers become, in effect, the brokerage firm for your college savings money. If you want to invest with the plan in your state, you have to work through the state’s administrator. You don’t have to invest in your state’s plan, however—you can invest in any state’s plan. But in general, you can a better income-tax deduction by contributing to your own state’s plan.”

You can also work with a financial advisor to choose a plan. You’ll pay for the service, of course, but some people prefer the convenience of having someone else figure it all out for them. If you’re already working with an advisor, this might be an easier option.

Most 529 investment plans then come with their own options: age-based plans or custom plans.

• With a custom plan, you choose how to divvy up your own assets (specific types of investments).
• With an age-based plan, your investment portfolio changes on its own as the beneficiary of the plan (your kid, grandkid, whomever) gets closer to college-age.