411 on 529

So this won't be as in depth as a good blog would be.

First, what is a 529 plan? It is a savings vehicle for college. Structured like a Roth IRA, contributions are made with after tax dollars (though most states offer some kind of credit/deduction), and proceeds can be used for college expenses with no capital gains incurred. The accounts are in the name of parents/grandparents etc with a named beneficiary, and the beneficiary can be changed if junior either finds college isn't for him/her or not all the money is used.

As government is wont to do, something simple (like funding a roth) is made more complex by establishing 529s as state sponsored investment vehicles--states contract with a small number of vendors to provide plans that can have either self-directed investments (you get to pick) or age-based allocations (similar to target retirement funds). Some states provide incentives for their state plans, and may offer other perks for staying in-state, but for the most part, there's no real reason to stay in state. Arizona was lacking for a while in the incentives, but starting this year, there is a $1500 deduction (for joint filers) through 2012. The big advantage of the credit is that it is not tied to Arizona plans, which is not the norm.

The Arizona Fidelity plan is decent, but two other AZ plans made Morningstar's list of 10 worst plans: Arizona PF 529 College Savings Plan and Arizona SM&R Family College Savings Program (although they no longer seem to exist).

The consensus leaders (because of low costs) all have some association with Vanguard: Utah, Ohio and Illinois. Nevada and Iowa also get some love.
An interesting one, which I haven't looked too deeply into is West Virginia's SMART529 Select program, which uses Dimensional Fund Advisor (DFA) funds. DFA relies on the academic work of Fama and French to create their passively managed, not quite index funds (a comparison with Vanguard). There is a premium for the West Virginia Plan, but it's the easiest way to invest in DFA (they are limited to advisors, or individuals with over $1 million in assets). I should point out DFA strongly tilts small and value, so in the charts in the comparison, it has had an "advantage" over the past 5 years, in which those areas have out performed)

What about the negatives? Obviously, there's a problem if a child doesn't go to college, but the beneficiary can be changed. Scholarships can also be matched, so if a student has $5000 in scholarships to cover costs, $5000 can be withdrawn without penalty. But if it needs to be cashed out for some non-covered costs, earnings (capital gains) are taxed as ordinary income with a 10% penalty, and that can be hefty based on your marginal bracket.

Other points...

As Jot noted, there is an advantage to be gained from not having the account held by the parents, as it will count as assets when it comes time to calculate financial aid. The benefit is probably small though--an account with not a lot in it will suffer very little (parent assets are calculated at 5.6% currently), and a large account will likely be held by parents of students who don't qualify for a lot of financial aid. It is a feasible plan though, as anyone can contribute to it (there doesn't need to be separate ones held by parents, grandparents, etc.), and it is my understanding that the tax deductibility is not based on being the account holder (meaning, if either set of grandparents made a contribution to the account held by the parent, the grandparents would get a deduction, or vice versa). The other disadvantage/annoyance would be the parent not necessarily having control over the investment decisions, though that can also be an advantage.

What about a Coverdell plan? They are more flexible in terms of payout (pre-college, tutoring, supplies), have similar advantages in terms of tax avoidance, but it is limited to $2000/year of contributions. I don't think it's tax deductible, but I didn't look too hard. They also have lower fees and a wider range of investment options (since there's no layer of state sponsorship). Vanguard offers coverdell plans; but there may be fees in early years tied to account balance. If you don't mind the extra account, I have read recommendations to fund Coverdell first each year, and then a 529, if you plan on saving more than $2000/year to take advantage of its benefits (Much like how one "should" fund the 401k to get the full match, then fund roth, then increase 401k savings again).

Another consideration is future changes to the plans or the creation of new plans. Since Coverdells can be liquidated easier/earlier, there's more flexibility in terms of taking advantage of new options (ie, a new vehicle comes along, you can spend Coverdell on non-U expenses, not have a lot locked up in a 529, and then start using the better vehicle). I started off this post thinking 529 exclusively, but depending on how many contributors there are and how much you plan on savings, Coverdells should be strongly considered as well.

Two research/comparison sites:

• Saving for College
• Rank 529 plans (can compare any Vanguard plan to any two other plans)
• A comparison of AZ, WV, UT, IA, OH and IL programs. hopefully.
  

Something else tangentially related: Upromise, a rewards site for education that can sweep rewards into a 529. I've done no background, but thought I'd throw it out there...