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 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.