Even after all these years in the investing business, I am still amazed by the lack of financial planning by most people. I constantly hear from folks who get right up to the edge of retirement and suddenly realize that they need to start saving – often much too late to accumulate the funds they will need in their golden years. 

And I've seen the same lack of planning in my friends and relatives who have children who will eventually grow up and go to college. The magic age seems to be about 12, when the parents decide that oh, my goodness, little Johnny isn't a rocket scientist or a football star, and we may have to foot the bill for college – in just five years! 

The result, of course, is that these parents and children are woefully unprepared for how much money they will need to save in such a short period of time, and many just can't do it – without borrowing huge sums of money. 

According to the College Board, tuition at a private, four-year [U.S.] college will set you back about $24,000 a year, while a good public institution may cost as little as $10,000. Add on room and board costs at private schools of some $8,595 (up 5% for the 2007-2008 school year) and $7,404 (up 5.3%) for public schools, and you can see why panic sets in. 

For the 2006-2007 school year, parents and students borrowed about $17 billion, through traditional college loans, the type of financing that is quickly drying up as a result of the United States' credit crunch. A more expensive form of college tuition is plastic. A recent survey from student lender Sallie Mae (NYSE: SLM, Stock Forum) and polling firm Gallup reports that 20% of parents are either borrowing more than $10,000 against their home equity or racking up credit card charges to pay college expenses. 

Consequently, the children often begin their post-graduate lives seriously in the red. And the costs are not going down. That's why it's more important than ever to have a plan and diligently stick with it. 

Fortunately, all is not lost. Parents who begin early have an ace in their pocket with the 529 College Savings Plan. 

What is a 529 Plan? 

529 plans were created in the 1980s to help parents save for college tuition, and exploded after the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) made qualified distributions exempt from income tax. 

529 Plans are operated by the individual states and every state (including Washington, D.C.) now offers a 529 plan. Thirty-two states offer just college savings plans, two states offering just pre-paid tuition plans and 17 states offer both. 

From just $2.6 billion in 2000, 529 plans grew to more than $92 billion by 2006. According to FinAid, by 2010, they estimate there will be a total of $175 billion to $250 billion invested in 10 million to 15 million 529 accounts. 

There are two types of 529s 

Prepaid: 

Prepaid plans are offered by states and/or educational institutions, many only to state residents. Tuitions are guaranteed and most plans also allow some transference of the contract to out-of-state schools. 

Performance is based on tuition inflation, not investment performance, so they are more conservative and may be more suitable for children just a few years away from going to college. 

Savings: 

529 Savings Plans are sponsored by the individual states, but not by educational institutions. Most have no state residency requirements, and performance is based upon the market performance of the underlying investments – mutual funds, money market funds, and certificates of deposit. Most plans will offer a range of age-based asset allocation portfolios, risk-based asset allocations, or a stable value or guaranteed option. 

The Security and Exchange Commission's website has a tremendous amount of information on 529 plans: 

http://www.sec.gov/investor/pubs/intro529.htm 

Additionally, here are a few websites that allow you to get copies of the individual state's plan prospectus, compare state plans, offer calculators, and a list of tax benefits: 

http://www.collegesavings.org/index.aspx
http://www.savingforcollege.com/intro_to_529s/what-is-a-529-plan.php
http://www.529s.com/ 

The advantages of a 529 Plan 

And speaking of benefits, 529s come with an array: 

·        Income tax breaks. Your money grows tax-free as long as it remains in the plan. Distributions for a beneficiary's college costs are also federally tax-free. Additionally, the state in which you reside may offer tax breaks, including a partial or full state tax deduction on contributions by its residents. 

·        The owner – not the beneficiary – of the account controls the account.  

·        You can change the beneficiary at any time. 

·        Everyone is eligible and contributions can be substantial, more than $300,000 in some states.  

·        Funds are not limited to paying tuition.They may also be used for fees, room and board, books, supplies, and equipment. 

·        Assets within 529 Plans are protected from bankruptcy. 

You will also want to ask the following questions to determine the best plan for you and your family: 

1.  Is the plan available directly from the state or plan sponsor? What are the fees? How much commission is the broker paid? How can I reduce or waive certain fees? Keep in mind that the lower the costs, the more money you will have in your plan. Most experts suggest trying to keep the annual cost at around 1%. 

2.  What are the restrictions on withdrawals? What college expenses are covered? Which colleges and universities participate in the plan? 

3.  What investment options are offered? How long are contributions held before being invested? 

4.  Does the plan offer special benefits or tax advantages for state residents? If it charges higher fees than another states' plan, do the tax advantages or other benefits offered by my state outweigh the benefits of investing in a less expensive plan in another state? 

5.  What are the limitations of the plan? When can I change investment options, beneficiaries, or transfer ownership of the account? 

6.  What is the past performance of the plan? Who is the program manager and when does his current management contract expire? 

529s are an easy way to sock money away for college savings. But since there are so many plans available, make sure you carefully compare them and consult your financial advisor to determine which plan best fits your needs.