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What's the best way to save for college?

July 5, 2012: 5:30 AM ET

What is the best way to save for a child's education? Are state Guaranteed Education Tuition (GET) programs best, or is another savings vehicle better? – April B., Washington

The Guaranteed Education Tuition plan is the state of Washington's prepaid tuition plan — and in general, a 529 college savings plan is the better choice. With a prepaid tuition plan, you're basically paying for future tuition at in-state public schools at today's prices. This seems like a good deal, but it's not risk free. "Most of the prepaid tuition plans are operating at an actuarial loss, meaning that they do not have enough assets to pay for future obligations," says Mark Kantrowitz, publisher of FinAid.org and Fastweb.com and author of Secrets to Winning a Scholarship. "The plans may be guaranteed, but only a third of the plans have any kind of a state guarantee. And it isn't clear exactly what that means." In other words, you may be left with a bad investment.

A 529 college savings plan isn't risk-free, either, but that risk can be managed. "Choose an age-based asset allocation, which starts off with an aggressive mix of investments and gradually shifts to a less risky mix as college approaches," Kantrowitz says. You should also stick with a direct-sold 529 plan, which carries lower fees than an adviser-sold version.

The only circumstance in which it might make sense to consider a prepaid tuition plan is in the case of divorce — if parents have agreed to split college costs and one wants to take care of his or her college support obligation in advance.

Unfortunately, Washington is the only state that doesn't offer a 529 college savings plan, so Washington families who want to put money into a 529 will have to look elsewhere. You can invest in any state's 529 plan; pay attention to fees, and if you can, choose a plan with lower expenses, such as those managed by Fidelity, Vanguard, or TIAA-CREF.

— Kate Ashford

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