While it's called a savings plan, these are actually investment plans that function much in the same way as other investment plans. You deposit money into your 529 account; the minimum and maximum you can deposit in your account varies state to state. This money is invested for you through an outside investment or brokerage firm.

Hopefully, your investments mature and grow. Then, provided the money is used for college tuition or related college expenses, you pay no federal tax on the money earned through the investment. (Many plans allow you to withdraw money for purposes other than college, but you then have to pay federal income tax and usually a penalty tax also.)

In addition to allowing you to invest money in a tax-free environment, 529 plans offer several other distinct advantages. When determining federal aid eligibility, your 529 plan is considered an asset. That means that it will be valued at 5.6% of its total. Compare that to the 20% evaluation of assets in your students name and you'll quickly see the advantage to this type of plan.

Also, distributions of 529 funds are not considered part of your base-year income. Therefore, 529 funds awarded one year will not have any impact on a students aid eligibility for the following year.

529 plans are available in most states and many states allow out-of-state investors. This means you'll need to shop around to select the plan that seems best for you. Some investors find it advantageous to work with a financial professional when choosing 529 plans. This might be a good idea if you have estate and tax planning issues to consider. You'll also want to keep in mind that 529 plans are investments and as such are subject to the vagaries of the stock market.