529-savings-plansThere are many different financial vehicles that you can use to save for future college tuition, but the only vehicle that is specifically designed to help parents pay for school are 529 savings plans. These specialized type of tax advantaged savings plans come in two forms: college savings plans or pre-paid tuition plans. The entire purpose of each type of qualified tuition plan is to provide a specialized investment option for college savers who want to make it possible for their children or other relatives to attend school.

While the money that accumulates in the account is meant to be used on getting a post-secondary education, like many types of tax-advantaged savings plans, there are restrictions as to what the distributions can be used on. If you do not learn about these restrictions that exist, it is possible that you will face tax penalties that will completely negate the entire purpose of putting away the money.

For parents or parents to-to-be who are planning to saving for their child’s college early, read on and find out if the funds can be used to attend an online college.

Differentiating Between Prepaid Tuition and College Savings Plans

Before you do your homework on whether or not your savings in a 529 plan will pay for online college tuition, you should familiarize yourself with the differences between prepaid tuition and general college savings plans. A prepaid tuition plan is typically government sponsored and will allow the account holder to buy credits or units at the institution’s current rate. The money in the account can only be used to pay the locked in tuition rates and mandatory application or enrollment fees. You may only buy credits or units from participating schools and must be a resident of the state.

Resource: Top 20 Online Colleges with High Return on Investment

A college savings plan does not lock in costs but offers the account holder a greater amount of flexibility. Instead of only covering tuition, these plans cover tuition, room, board, fees and the cost of supplies. The funds can be used at most colleges throughout the nation and the beneficiary is not required to be a resident, but the funds in the account are not guaranteed by the state.

Which Type of Savings Plan Will Pay for Online College?

Now that you know the differences between the types of plans that are available in each state, it is time to find out which option is right for you when you are saving for the future costs of distance education. If you were to deposit into a prepaid tuition plan, you would need to see the list of participating schools. While strictly online colleges are not eligible, there may be colleges and universities that have online program options. The college savings plan is a much better option. This is because all costs that are incurred at accredited colleges that are recognized by the US Department of Education should be covered. Room and board costs may not be covered because you are studying from home.

Whenever you are choosing an investment vehicle, you need to be familiar with restrictions and potential penalties. By using the funds in 529 savings plans as they were intended, you can save on taxes and pay for your child’s college without having to take out expensive Federal or private loans.

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