The following should not be considered tax or investment advice. Please consult your personal tax or investment professionals for more information.
What Are College Savings Plans?
While scholarships and grants are excellent, they usually won’t bring your net cost to zero. Tax-advantaged savings plans can help families save money and prevent student indebtedness.
Statistics show that a majority of parents have saved far less than what they will need for college. According to The Education Plan, students are four times more likely to graduate from college if their 529 plan has as little as $500. The earlier you begin investing, the more your plan can compound, tax-free. Here are some suggestions to be more successful at saving in a 529 account. Currently, 16 million accounts exist with an average of $30,295 saved.
As you look for a college savings plan, consider your options. Some plans are sold directly by the state, while others are sold through advisors who may charge service fees. Many states offer starter and/or matching funds to residents, as well as state tax credit incentives.
Some plans allow non-residents to pay in-state tuition. Many plans allow friends and family to contribute online or by mail. Each plan has varying minimum initial investments and contributions, but several plans can begin with only $10. If a child chooses not to attend college, plan beneficiaries can be changed to other children or grandchildren. Read more on 529 plan rules here.
The Two Types of 529 Plans
Qualified Tuition Plans. Investments grow tax-free and can be withdrawn tax-free for educational expenses like tuition, room and board, and required textbooks. Many states offer 529 qualified tuition plans.
Prepaid Tuition Plans. Families can prepay some or all of the in-state public tuition expenses, locking in the tuition rate at the time of payment. Some states offer prepaid tuition plans, which allow students and families to pre-purchase college credits at qualified institutions. A private college 529 plan (not state-restricted) also offers prepaid tuition options at nearly 300 private institutions.
Keep in mind that 529 plan savings can affect financial aid by increasing your Student Aid Index (SAI), which replaced the Expected Family Contribution (EFC) in 2024, calculated using the Free Application for Federal Student Aid (FAFSA). Withdrawals must be used for qualified educational expenses (not applications or travel costs), and they must occur in the same year as the expenses. Newly allowed expenses include K12 expenses, trade schools, credentialing programs, AP tests, tutoring, test prep, and workforce training.
Currently, 529 plans are also allowed to pay up to $10,000 of student loans during an individual’s lifetime. And leftover funds can be shared with siblings or forwarded to future children/grandchildren. In some situations, funds can also be converted to Roth IRAs without penalty. Consult your financial advisor with questions.
Other great, but underutilized, college saving vehicles are Roth IRAs and Coverdell Education Savings Accounts (ESAs) (similar to 529 plans), and you can invest in these, in addition to 529 plans, to save for college expenses.
Related Websites
529 Plan State Tax Calculator (Merrill) | This free tool can help you determine if your state offers tax deductions or other tax advantages, and how much you may be able to save on your state taxes.
Ugift | This convenient, free service allows others to easily contribute to your student's 529 college savings plan account.
Upromise | Boost your college fund with cash back on everyday purchases when you connect Upromise to your college savings plan.
529 College Savings Plans Network | Clearinghouse of information to encourage 529 participation.
