WASHINGTON -- There's one thing about saving for college that has always left me scratching my head. Why is it that one of the first questions parents ask about Section 529 college savings plans is how are these plans treated when calculating their child's federal financial aid eligibility? What befuddles me is the thinking that must be behind the question -- that having money in one of these tax-favorable savings accounts will reduce a college student's financial aid from other sources such as grants, scholarships or loans, and so the parents might not open one as a result.
    
There are two types of 529 plans. One is a state-sponsored investment account in which your contributions grow tax-free and then the money you later take out is also free from federal taxes as long as it is used to pay for qualified higher education expenses.
    
Then there is a 529 prepaid tuition plan in which you purchase a contract to buy in advance all or part of a public in-state education. Prepaid 529 plans are generally guaranteed by state governments to at least match in-state college tuition increases.The prepaid tuition plan hasn't been as attractive to parents as the savings plan because of how it's treated in the calculation for federal financial aid, according to the National Association of State Treasurers and the College Savings Plans Network.

 
    
On a sliding scale, schools expect parents to contribute a maximum of 5.64 percent of assets and income to their child's college education, according to Joe Hurley, founder and CEO of www.savingforcollege.com. Students are generally expected to contribute 35 percent of their assets and 50 percent of their income. Many parents have been reluctant to put money in a prepaid 529 plan because it was considered a student resource, resulting in a dollar-for-dollar reduction in the need-based financial aid package.
    
The 529 savings plan, on the other hand, is treated as a parental asset. Although, just like prepaid plans, this money is specifically earmarked for college or career schools, it's instead treated just like any other savings a parent might have, according to the National Association of State Treasurers. Frankly, it really shouldn't matter how either account is used in the aid calculation. Yes, any savings you have can reduce how much aid your kid gets.  But the alternative is what? Not to save and pray your child will qualify for a lot of free money or federally backed loans?
    
Since it does matter, many parents will be happy to hear that Congress recently changed the way prepaid 529s are treated in determining financial aid.  Thanks to the Deficit Reduction Act of 2005, both prepaid and savings plans will be considered parental assets in the determination of federal financial aid beginning July 1.
    
``I always thought the financial aid treatment was the biggest problem with prepaid tuition plans,'' Hurley said. ``This change will make them more attractive. It's a good vehicle to hedge against tuition inflation.''
    
To understand the question about the wisdom of choosing a 529, you have to know that the government expects parents to contribute to their child's education. This is called the Expected Family Contribution, or EFC. The EFC is calculated according to a formula that includes your family's income (taxable and untaxed), assets, and benefits (unemployment or Social Security). Also considered is your family size and how many family members are attending college.
     
The EFC measures your family's financial ability to pay for college, and is used by schools to determine your eligibility for federal student aid during one school year. Financial aid includes grants, scholarships, work-study programs and low-cost student loans. Some of the aid is need-based, which means students must meet specific financial criteria in order to receive it.
    
(By the way, I do hope if your child is attending college in the fall you have already filled out a Free Application for Federal Student Aid form. Applying early increases a student's chances of getting aid. The FAFSA form is available through high school guidance offices, colleges or universities, local libraries or online at www.fafsa.ed.gov.) The change in how prepaid plans are treated should eliminate a major source of confusion for families and financial aid administrators, said Jackie Williams, chair of the College Savings Plans Network and executive director of the Ohio Tuition Trust Authority.
    
``I hope this encourages more families to save for college using Section 529 plans which are the best savings vehicles for college,'' Williams said.
    
I hope so too. The way the cost of college is escalating, most of us will need whatever we can save plus financial aid.  I like Section 529 plans. Although there is a downside to prepaid plans, mainly that your principal plus earnings may not cover tuition and fees if your child decides to attend a private or out-of-state college or university, it's still something to consider. I would rather hedge my bet by saving as much as I can either in a prepaid or savings plan than worry that if I save too much, my children won't qualify for aid. By saving, at least I know for sure they will have something to help pay for their college education. 

Listen to Michelle Singletary discuss personal finance every Tuesday on NPR's ``Day to Day.'' To hear her reports online go to www.npr.org. Readers can write to her c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.
    
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