College tuition rates vary from school to school. The average annual cost of tuition at a public university is approximately $9,000 while private colleges may charge $35,000 or more. College tuition fees are expected to increase significantly within the decade. A 529 college savings plan can provide parents and students a way to save money for school.

A 529 college savings plan is a financial product that provides several tax advantages. It was created in 1996 when the IRS tax code was amended to allow for this type of account. Up to $300,000 of after tax funds may be contributed to the plan and no tax is charged on the interest earned. However, any withdrawals from the account must be used for approved educational expenses only.

Types of Plans

Although each state has its own 529 college savings plan, there is no restriction on where the plan can be set up or what college the money can be paid to. A person living in Washington can establish a savings plan in Michigan and pay for expenses at a school in Florida.

There are two types of plans: prepaid and savings plans. The savings plans work like an IRA where contributions are made to a mutual fund. The interest earned remains in the account. Prepaid plans allow families to purchase credits at a local school at current tuition rates for use in the future. Generally, prepaid plans are only offered by colleges.

Costs Associated with a 529 College Savings Plan

* Withdrawal of funds for non-educational use will incur a 10 percent tax penalty as well as normal income tax being charged on the interest earned.

* Prepaid plans will typically incur enrollment and administrative fees.

* Savings plans may incur annual maintenance fees, asset management fees, a commission on plans sold by brokers (about 0.25 percent to 1 percent of investment), and enrollment fees.

* The fees charged can vary between plans. Researching a variety of plans can uncover one that fits your needs and finances.

How to Set Up a 529 College Savings Plan

You can work directly with a 529 plan manager to set up an account. There are directories online that provide contact information for plan managers in each state. The other option is to work

with a financial advisor who can provide more information about the 529 college savings plan.