Mellody's Math: Tips on Paying for College

529 plans — Individual states sponsor their own 529 plans, which are managed by independent financial firms, and many offer more than one type of plan. There are two types of plans: prepaid tuition plans and college savings plans.

A prepaid tuition plan allows you to purchase future education credits at today's tuition prices. Credits can generally be used at any educational institution accepting federal financial aid, but only apply to tuition costs (not books, room or board). The downside of this type of plan is that it usually comes with higher fees and lately, offers no guarantees on total tuition coverage.

The second type of plan, a college savings plan, resembles a 401(k) plan in that you choose from an array of investment options and contribute to them over time. Earnings and withdrawals are tax-free provided you use them for education expenses (most states penalize non-education withdrawals at about 10 percent of the earnings). The primary advantage of a college savings plan is greater flexibility.

In addition, unlike an Education Savings Plan, most states do not restrict how much you can contribute to a 529 plan. In fact, you can contribute up to $11,000 per year per child without having to pay gift tax, and many state plans allow total contributions of over $200,000 per beneficiary.

Depending on where you live, you may be able to deduct some or all of your 529 plan contributions from your state taxes. However, with many states facing budget crises, if you invest in a plan outside of your home state, the tax benefits may be dwindling. In recent months, Maine, Illinois, Tennessee and New York announced they would tax residents who invested in out-of-state plans. Given the overall benefits of 529s though, don't let this potential dissuade you from investing in one.

Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.