529 Plans and Other Ways to Save for College

This guide provides tips for saving for college with a 529 plan. Here, you'll also find other helpful tips and expert advice to help you save for college.

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529 Plans and Other Ways to Save for College

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According to the National Center for Education Statistics, undergraduate tuition, room, and board at public institutions rose from $13,561 in 2007-2008 to $17,979 in 2017-2018, amounting to a 31% increase. The cost of attendance at private institutions rose 23% during the same 10-year period, from $34,890 to $42,681. The increasing cost of college education may discourage students from getting a degree.

In an effort to boost college attendance by making it more affordable, the federal government administers several scholarship and grant programs. In addition, each state maintains qualified tuition plans, which are tax-free programs that help cover the cost of college education. This guide focuses on 529 plans, but it also includes other ways that students can save for college.

What is a 529 Plan?

A 529 plan is a "tax-advantaged savings plan designed to encourage savings for future education costs." Each state, plus the District of Columbia, sponsors at least one type of 529 plan. Some higher education institutions also sponsor prepaid tuition plans.

Prepaid Tuition Plans vs. Education Savings Plans

Type 1: Education Savings Plan

An education savings plan allows savers to open an investment account for a beneficiary's future educational expenses. Account owners can use withdrawals from this plan to pay for college tuition, fees, and room and board. They can also use it for elementary and high school education, usually up to $10,000.

As long as withdrawals are used to pay for qualified educational expenses, account holders do not pay taxes on the interest their money accrued during the time it was invested. This type of 529 college savings plan does not typically maintain a residency requirement.

Type 2: Prepaid Tuition Plan

People with prepaid tuition plans purchase units or credits from participating institutions, which are often public in-state colleges and universities. Funds from this type of college savings plan can only pay for tuition and fees and do not cover room and board. Prepaid tuition plans often require participants to be residents in the sponsoring state.

Savers can only use funds from prepaid tuition plans for higher education tuition and fees. They cannot use them for elementary or high school expenses. Beneficiaries who enroll in a non-participating institution may receive less than they would have received if they enrolled in a participating school.

5 Benefits of a 529 Plan

  • 1. You get a tax break

    Tax regulations governing contributions to a 529 college savings plan differ among states. However, states typically regard 529 plan contributions as tax deductible. Savers should keep in mind that local and state laws regarding college savings plans may change over time.

  • 2. Contributions are considered gifts

    As of 2021, a 529 plan can receive contributions of up to $15,000 each year from non-account holders. As long as individual contributions do not exceed this amount, plan beneficiaries qualify for the annual gift tax exclusion. Contributors often include grandparents and other close family relatives.

  • 3. The person who opened the account controls the account

    Only the person who opened the 529 plan can make changes to the plan. Account holders can also borrow against the plan, make an early withdrawal, and close the plan entirely.

  • 4. Minimal impact on financial aid eligibility

    Students must declare a 529 plan as part of their assets when they file the FAFSA. Schools and financial aid administrators often require this information when calculating a student's expected family contribution. However, institutions usually only factor in a small percentage of the 529 plan in the final calculation of student aid. As such, it often has minimal impact on the amount of financial aid students receive.

  • 5. Funds can be used at most higher education institutions

    Beneficiaries can often apply the funds from a 529 college savings plan toward any accredited institution, including community colleges and technical schools. Prepaid tuition plans may limit use of the funds to participating in-state institutions. Some education savings plans allow students to apply their 529 plan benefits toward international schools.

How to Open a 529 Plan

The steps required to open a 529 plan differ among states and host institutions. In general, however, opening a college savings plan includes the steps outlined below.

Individuals who open a 529 plan in their state can take advantage of the income tax benefits from their contributions to the plan. Although some 529 plans have restrictions, most plans allow savers to apply their benefits toward any in-state or out-of-state institution that meets the plan's eligibility criteria. Tax regulations related to college savings plans vary among states. Savers should research the regulations in their state to learn more. Potential savers should consider their individual circumstances before deciding on a type of 529 plan. For example, couples with young children may benefit from an education savings plan that can easily accommodate life changes. A prepaid tuition plan may benefit families with children closer to college age since they might have a clearer idea of what college or university their children will attend. A person can often apply for a 529 plan on the plan's website. To open an account, savers typically must submit their name, mailing address, date of birth, and the Social Security numbers of the account owner and beneficiary. Some plans ask for the name and information of a successor account owner in case the original account owner dies or becomes incapacitated. Account owners can contribute to a college savings plan in many ways, including automatic payments from a linked account, payroll deductions, and checks. The IRS does not set contribution limits for 529 college savings plans. However, each state sets a maximum aggregate limit. This amount cannot be more than the beneficiary's expected cost of college attendance. Account owners can usually choose the investment instruments for their 529 plan contributions. This can include mutual funds and static and target-date portfolios. States do not guarantee 529 plans. A 529 plan may earn interest or lose value, depending on the performance of the portfolios it contains. However, the FDIC may insure investments in some principal-protected bank products.

529 Plans by State

STATE PLAN NAME(S)
Alabama CollegeCounts 529
CollegeCounts 529 Advisor Plan
Alaska John Hancock Freedom 529
T. Rowe Price College Savings Plan
University of Alaska College Savings Plan
Arizona College Savings Bank 529 Plans
Fidelity Arizona College Savings Plan
Ivy Funds InvestEd 529 Plan
Arkansas GIFT College Investing PlaniShares 529 Plan
California ScholarShare College Savings Plan
Colorado CollegeInvest Direct Portfolio College Savings Plan
CollegeInvest Scholar's Choice College Savings Plan
CollegeInvest Smart Choice College Savings Plan
CollegeInvest Stable Value Plus College Savings Plan
Connecticut CHET 529 College Savings Program
CHET Advisor College Savings Program
Delaware Delaware College Investment Plan
District of Columbia DC College Savings Plan
Florida Florida Prepaid College Board Plans (College Savings and Prepaid Plans)
Georgia Path2College 529 Plan
Hawaii HI 529 College Savings Plan
Idaho IDeal Idaho College Savings Plan
Illinois Bright Directions 529 Plan
Bright Start College Savings Plan
Bright Start Advisor College Savings Plan
College Illinois Prepaid Tuition Plan
Indiana College Choice 529 Direct Savings Plan
College Choice Advisor Savings Plan
College Choice CD Savings Plan
Iowa College Savings Iowa 529 PlanIAdvisor 529
Kansas LearningQuest 529 Education Savings Plan (Direct and Advisor)
Schwab 529 Savings Plan
Kentucky Kentucky Affordable Prepaid Tuition
Kentucky Education Savings Plan Trust
Louisiana START Saving for College
Maine NextGen College Investing Plans (Direct and Select)
Maryland College Savings Plans of Maryland (Savings and Prepaid Tuition)
Massachusetts UFund Massachusetts 529 Plan
UPlan Prepaid Tuition Plan
Michigan MI 529 Advisor
Michigan Education Savings Program
Michigan Education Trust
Minnesota Minnesota College Savings Program
Mississippi Mississippi Affordable College Savings Program
Mississippi Affordable College Tuition Plan
Missouri MOST 529 College Savings Plan
Montana Achieve Montana
Nebraska Nebraska 529 College Savings
Nebraska NEST Advisor Plan
State Farm 529 Savings Plan
T.D. Ameritrade 529 College Savings Plan
Nevada Nevada Prepaid Tuition Program
Putnam 529 for America
SSGA UPromise 529
USAA 529 Plan
Vanguard 529 Plan
New Hampshire Fidelity 529 Advisor Savings Plan
Fidelity Unique College Investing Plan
New Jersey Franklin Templeton 529 College Plans
NJBEST 529 College Savings Plan
New Mexico Scholar's Edge 529
The Education Plan (Direct)
New York New York's 529 Advisor Guided College Savings Program
NY'S 529 College Savings Program
North Carolina NC 529 Plan
North Dakota College SAVE
Ohio BlackRock CollegeAdvantage 529 Plan
Ohio Tuition Trust AuthorityCollegeAdvantage 529 Plan
Oklahoma Oklahoma 529 College Savings Plan
OklahomaDream 529
Oregon MFS Oregon 529 Plan
Oregon College Savings Plan
Pennsylvania PA529
Rhode Island CollegeBound 529 and CollegeBound Saver
South Carolina Future Scholar 529 College Savings Plan (Direct and Advisor)
South Carolina Tuition Prepayment Plan
South Dakota CollegeAccess 529 (Direct and Advisor)
Tennessee Tennessee BEST Prepaid Plan
TNStars College Savings 529 Program
Texas LoneStar 529 Plan
Texas College Savings Plan
Texas Guaranteed Tuition Plan
Texas Tuition Promise Fund (Prepaid)
Utah my529
Vermont Vermont Higher Education Investment Plan
Virginia Virginia529 CollegeAmerica
Virginia529 CollegeWealth
Virginia529 inVest529
Virginia529 Prepaid529
Washington Guaranteed Education Tuition
West Virginia SMART529 College Savings Plans (Direct, Select and Hartford)
Wisconsin EdVest College Savings Plan
Voya Tomorrow's Scholar 529 Plan
Wyoming Virginia529 (open to WY residents; no in-state 529 program currently offered)

Other Ways to Save for College

A 529 plan offers several advantages. However, parents and guardians can also explore other ways to pay for college, including the four options described below.

Coverdell Education Savings Accounts

People with a Coverdell Education Savings Account can use the funds to cover elementary school, high school, and higher education expenses. This type of account is a custodial account. It's strictly for beneficiaries younger than 18 years old at the time of opening the account or beneficiaries with special needs status. Account holders can only contribute to the fund in cash. Contributions cannot exceed $2,000 per year, and contributions are not tax deductible.

U.S. Government Bonds

Bond owners who redeem eligible U.S. savings bonds to pay for qualified higher education expenses can exclude the interest paid on the withdrawn amount from their taxes for that year. Bond owners who use withdrawal funds for non-education expenses cannot access this exclusion. Only savings bonds issued before the owner was 24 years old qualify for this exclusion. The exclusion covers educational expenses for the bond owner, their spouse, and legal dependents.

UGMA/UTMA Custodial Accounts

Parents can set up a custodial account for their children under the Uniform Gift to Minors Act without the need for an attorney to prepare trust documents. The account is only subject to state regulations. The Uniform Transfer to Minors Act allows beneficiaries to own other types of assets, such as real estate, fine art, and patents. The main difference between a 529 plan and a UGMA/UTMA custodial account lies in the manner beneficiaries can use the funds upon withdrawal. Beneficiaries can only use 529 plan funds to cover education expenses. Beneficiaries of a UGMA/UTMA custodial account can use the money for any purpose.

Roth IRAs

Since a Roth IRA is funded with after-tax dollars, account owners cannot claim a tax deduction on their contribution. However, the IRS does not tax withdrawals from a Roth IRA. The government imposes income and annual contribution limits for Roth IRAs, which often change. Although a Roth IRA is a retirement account, owners can use the funds for any purpose, including education expenses for their dependents.

10 Expert Tips on How to Save for College

Mark Kantrowitz is a bestselling financial author, with books discussing financial aid, saving for college strategies, and student loans. His career and experience as a publisher and vice president of research at Savingforcollege.com make him a sought-after expert in financing higher education. Mr. Kantrowitz offered the following tips on saving for college:

"Time is your greatest asset. The sooner you start, the more time you have for your earnings to compound," Kantrowitz says. "Start saving as soon as possible, when the child is born. In fact, start saving before the child is born." Parents and guardians can get a jumpstart on saving for their child's future education by opening a taxable savings account and transferring those funds to a 529 plan later on. They can also simply open a 529 plan with the account holder listed as the beneficiary and later change the beneficiary to the child. "How do you go about saving? The first thing you need to do is make it automatic so you don't have to take an action every single month in order to save," Kantrowitz explains. People often forget to make a contribution, or they may spend the money for other purposes if it is not automatically withdrawn. "Every 529 plan has an automatic payment option. Some plans even have payroll deductions for participating employers. The minimum amount that you need to contribute per month to sign up for automatic investment is typically around $25." "Every dollar saved is a dollar less you're going to have to borrow. And college savings plans are the antidote to student loan debt. If you were to save one dollar per day, you would accumulate, between the interest and the contributions, about $10,000 by the time the child enrolls in college," Kantrowitz stated. In addition, it's wise for parents to deposit lump sums from tax returns, work bonuses, and other monetary surpluses into their child's 529 account when possible. "Ideally, your college savings goal should be to save a third of the future college cost. When we break it up into monthly amounts, it's more attainable. Some people can't afford $250 per month, so you start low and gradually increase it." Kantrowitz recommends reallocating old expenses, such as diaper costs, to increase monthly contributions to 529 plans and to make more mindful decisions when spending. "You can't avoid the potential for losses; what you can do is manage it, and that's why age-based asset allocations are a good choice. Even if you have a big loss at the beginning, you have 17 years to recover. " According to Kantrowitz, choosing an age-based asset allocation plan allows account holders to take greater investment risks earlier in the savings process, giving investors plenty of time to bounce back and regrow funds after any economic downturns. "Within the 529 plans, you have a bunch of different investment opportunities. I recommend doing an age-based asset allocation. It starts off aggressive, and as the child gets closer to college, you can shift to a more conservative mix of investments," said Kantrowitz. Ideally, account holders begin by investing 80-100% of funds in equities, and gradually reduce that percentage to around 20% as the child nears college. When deciding which type of plan to buy — a plan with the lowest fees or a plan with the best tax incentives — Kantrowitz recommends investors focus on the lowest fees when the child is young. Direct sold plans eliminate the financial mediary of an advisor plan and come with fewer fees. However, some people may find peace of mind through an advisor plan, as there is a financial professional on your side to help calm the storm during stock market turmoil. "Investing in individual stocks, in many cases, is just far too risky. You might as well go out and buy a lottery ticket. What you want to do is invest in broad-based mutual funds, like an S&P 500 fund," Kantrowitz advises. Choosing these funds follows the broad trend of the market, offering a greater probability of success than investing in individual stocks. Individual stock investing is the financial equivalent of putting all your eggs in one basket. "I think you should always consider your own state's 529 plan. There may be other benefits, like matching contributions or seed money for saving in your own state. Thirty-four states and the District of Columbia offer a state income tax deduction or tax credit on your contributions to the state's plan." If the tax rate is 5%, that's like getting a 5% discount on tuition, Kantrowitz explained. While Kantrowitz recommends age-based asset allocation plans, he also has some suggestions for improvements: "I think people move off of the high percentage equities too quickly. I think that maybe you should spend 5-10 years in 100% equities, then switch to age-based allocation." This aggressive strategy may yield greater profits early on to grow funds quickly.

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