When it comes to saving for college, it's hard to beat 529 plans. These are long-term investment accounts like Roth IRAs and 401(k) plans -- but even better. Not only is the interest earned on a 529 account tax-free, but you can deduct contributions to the account from your state taxes (up to a certain limit). And if you use 529 funds to pay for college, you don't even pay taxes when you withdraw the money.
Next to "free money" like grants and scholarships, saving for college is the best form of financial aid. Every dollar you save is one less dollar you need to borrow in student loans. By investing in a 529 plan, the interest works for you. When you take out a loan, the interest works against you [source: FinAid].
State treasuries manage 529 plans. The investments themselves are handled by private investment firms and mutual funds. Most states offer one or more 529 plans. The best part? You can choose to invest in any available 529 plan regardless of where you live or want to go to college. There are many Web sites that compare 529 plans for the highest yield and the best tax advantages.
A twist on the 529 savings plan is the prepaid 529 plan. Prepaid 529 plans let you lock in the current price tag of a state college education and begin paying it off immediately. Interestingly, prepaid 529 plans don't restrict you from using the funds in another state: You can even convert the funds for use at a private college or out-of-state school [source: SavingForCollege].
Read How 529 Plans Work for more information about the benefits and requirements of this powerful college savings system. And take a look at the next page for links to lots more information about college financial aid.