Tax-favored 529 plans come in two varieties:
College savings plans allow you to put your money into investment accounts. You may enjoy superior returns or suffer a loss, depending on the results of those accounts.
Prepaid tuition plans, offered by 18 states, guarantee that your return will move up in value, along with tuition increases in those states.
However, you’ll probably pay a premium in prepaid tuition plans, which effectively reduces your return. Over a long time period, if tuition costs in your state increase by 7 percent a year, your actual return might be around 5.5 percent, because of this upfront premium payment.
In addition, prepaid tuition plans may limit your choices to in-state public universities. (You’ll get a refund if your student goes elsewhere.) Therefore, one approach to college funding is to split your money between 529 investment plans and prepaid tuition plans.