529 vs. Stocks for Kids

College graduates earn 73 percent more than high school graduates over their lifetime.

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The average cost for undergraduate tuition, room and board at public institutions ballooned 37 percent between 2000 and 2010, according to the National Center for Education Statistics. Prior planning can help take some of the stress out of paying for your child or grandchild's college education. Options to consider include opening a 529 plan or putting stocks in the child's name.

529 Plans

Congress created qualified tuition programs in 1996 to help people save for college. "529" plans are named after the section of the Internal Revenue Code that governs how the plans are taxed. 529 plans are tax-advantaged savings plans sponsored by public or private educational institutions, states or state agencies. 529 plans can take the form of a college savings plan or a prepaid tuition plan, and there are pros and cons to each type of plan. Every state and the District of Columbia offers at least one type of 529 plan, according to the Securities and Exchange Commission.

Prepaid Tuition

One of the big advantages of prepaid tuition 529 plans is the ability to lock in today's tuition prices for future education needs. All prepaid tuition plans are set up to cover the cost of tuition and fees, and some will allow you to cover additional college expenses, such as room and board or even computer technology and equipment. These plans typically have an open enrollment period, and require an initial lump-sum deposit and regular installment payments based on the beneficiary's age.

College Savings Plan

College savings 529 plans give you the flexibility of putting your money into a broader range of investment products, including mutual funds and stocks. What you gain in investment options, you might lose in security. Prepaid tuition plans often come with a guaranteed base result, but college savings plans offer no such guarantee. Your investments in this kind of plan might go up or decrease in value. You can use the proceeds from your college saving plan to pay for all qualified college expenses, including tuition, fees, books, computer equipment and room and board.

529 Plan Considerations

If you set up a 529 plan it belongs to you regardless of who you choose to be the beneficiary, and you control when withdrawals are made and how they are spent. You can't take a tax deduction for contributions to either type of 529 plan, but all of your investments in such plans grow on a tax-deferred basis, similar to funds in an individual retirement arrangement. The earnings on your investments in a 529 plan are free from federal income tax if you use them to pay for qualified educational expenses. If you withdraw funds from your 529 plan for any other reason, the earnings are taxed as ordinary income and are subject to an additional 10 percent tax penalty.

Stocks for Children

You might consider purchasing stocks for children rather than opening a 529 plan. Even though minors cannot own stocks in their own names, you can set up a custodial account for them under the Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act and buy stock for them in that account. As the custodian of the account, you control the investment decisions regarding stocks in the account until the child reaches the age of majority, typically age 18 to 21. While this can provide a sizable nest egg for the child's college education, once she reaches her majority, the account becomes hers and she can do with it as she pleases, including spending the money in the account on things other than paying for college.

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