Tax-Free College Savings Programs

Section 529 of the IRS code allows tax-free funds to be set aside for college. With Qualified Tuition Programs (QTP), you can prepay tuition (locking in today's tuition rate) to set aside money for college.

By far the plan most utilized for college savings is the 529. It's an education savings plan or ESA, operated by a state or educational institution and designed to help families set aside funds for future college costs. As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant. 529 plans are usually categorized as either prepaid or savings, although some have elements of both. Every state now has at least one 529 plan available. It's up to each state to decide whether it will offer a 529 plan (or possibly more than one), and what it will look like. Educational institutions can offer a 529 prepaid plan but not a 529 savings plan (the private-college Independent 529 Plan is the only institution-sponsored 529 plan thus far)

For more information on tax incentives for education, see IRS Publication 970, Tax Benefits for Higher Education.