Federally guaranteed College Loans are made directly to students through Sallie Mae who is now in competition with the banks. Sallie Mae, formally SLM Corp., was a federally sponsored company until 1997, when a majority of shareholders voted to sever its ties to the government. The Fortune 500 company still buys college loans from banks, bundling them into securities for sale on Wall Street.

Sallie Mae has some $52 billion in assets and more than 7,000 employees nationwide. It also makes loans for study by adults, runs loan-collection agencies and sells technical products and services to colleges and universities. In May 1999, it bought New England-based Nellie Mae, the seventh-largest holder of federally backed student loans.

The Coverdell ESA (the old Education IRA program) is the most popular alternative to the 529 plan. While assets in a Coverdell also grow tax-free (and can also be used to pay for qualified elementary and secondary school expenses), there’s a $2,000 annual contribution limit.

The 529 prepaid tuition plan became part of Section 529 of the Internal Revenue Code in 1996. Prepaid tuition plans are just what they sound like: Your investment buys a given number of tuition credits that can help lower the final amount of your college loans.

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