Talked to any medical students lately? If so, you probably heard that many have thousands of dollars in debt. They tell you their student loans may determine their choice of residency and practice location. I feel sorry for them.

Is there anything that can equip these students--or your own children--to handle the pricey environment of universities and medical schools? What can you do to prepare for the high costs?

Use a college savings program dubbed a "529 plan," named for the section of the Internal Revenue Code that created it. You can save money, reduce taxes and retain control of the funds. It's almost too good to be true.

The federal government started 529 plans to encourage parents, grandparents or even friends to save for a beneficiary's higher education. The plans vary slightly from state to state. Any U.S. resident age 18 or older can open a 529 plan. The contribution limits are quite generous. This year, individuals can contribute--free of gift and inheritance tax--a maximum of $60,000 at one time. A couple can contribute $120,000 for each beneficiary. California allows a beneficiary to have a maximum of $300,000 in total 529 plan contributions.

Over time, the assets in the 529 plan grow, and when it's time for Junior to enter the hallowed halls of higher education, Mom and Dad simply take the money out of the plan. As the owners of the plan, Mom and Dad control the distribution of the assets--not Junior. The money can be used to pay for tuition, supplies, room, board, books and beer ... well, maybe not that last one! The money goes into the 529 plan after income tax, but is withdrawn free of federal and state tax. Note: this particular tax provision is scheduled to expire on Dec. 31, 2010, unless federal legislation extends the law.

What if the owner of the 529 plan takes the money out and uses it for purposes other than higher education of the beneficiary? Maybe Dad needs a new car, boat ... or airplane! In that case, the gains on the withdrawn funds are subject to federal and state income tax as well as a 10 percent federal penalty. The recipient of the money pays the income tax at his or her tax rate. If Dad uses the money, the taxes are at his rate. If Junior, not Dad, receives the money for purposes other than higher education, he pays the 10 percent penalty and the taxes at his own tax rate.

What if the original beneficiary of a 529 plan does not want to use the money for college? The owner of the plan can designate a new beneficiary. However, the new beneficiary must be a family member of the original beneficiary.

And, in the best of all worlds, what if a 529 plan beneficiary receives a scholarship? In that case, funds can be withdrawn from the plan up to the value of the scholarship. There is no 10 percent penalty and federal and state taxes are paid at the recipient's tax rate.

Speaking of scholarships, one question people frequently ask is: "How does a 529 plan affect my child's eligibility for a needs-based scholarship?" The U.S. Department of Education weighs the student's financial assets more heavily than the parent's when determining eligibility for needs-based scholarships. The money in a 529 plan is considered an asset of the plan owner, not the student.

Many banks and investment companies offer 529 plans. Your plan does not have to be sponsored by your state of residence. So you can shop around for the plan and investments that appeal to you most. A variety of investment choices are available, such as domestic stock, international stock and bond portfolios. As owner, you may choose one or several of these funds. You can also choose a popular "age-based" investment option. Typically, the investments are heavily weighted in stocks when the plan beneficiary is very young. As he approaches college age, the assets are gradually shifted to bonds and cash.

Overall, 529 plans are an excellent way to save for a child's higher education. The money grows tax deferred and is distributed tax-free as long as it is used for qualified higher-education expenses. The owner retains control of the money and can choose from among many investment options. And for the purposes of needs-based federal scholarship programs, 529 plans are considered an asset of the plan owner, not the beneficiary. The most difficult part in all of this may be convincing your children to go to medical school!

Paul Kirz, MD, CFP, is an orthopedic surgeon, certified financial planner and registered investment adviser. He can be reached at 562/698-7946 or PKirz@aol.com.