529 plan pros and cons: Is it a good idea?

A mother and daughter embrace next to a parked car on a college campus.Image: A mother and daughter embrace next to a parked car on a college campus.

In a Nutshell

A 529 plan is a tax-advantaged investment account that can help you start saving for college for a beneficiary, such as your child. If you're considering saving for education, you should be aware of these 529 plan pros and cons, which include tax breaks and fees.
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For many Americans, higher education is a path to a better lifestyle, and plenty of parents envision their little ones attending college one day. But how will they pay for it?

The average undergraduate student attending a four-year public institution in their home state will pay $9,678 for tuition alone, according to 2023 report from the Education Data Initiative. That high price tag helps explain the total amount of student loan debt outstanding in the U.S. — $1.6 trillion in the third quarter of 2023, the Federal Reserve Bank of New York reports.

Yet, in the face of those staggering numbers, “only 58% of parents with children under the age of 18 are saving for college,” says Paul Curley, director of savings research at data provider ISS Market Intelligence. “And that percentage needs to go higher.”

Instead of relying on financial aid, consider starting a qualified tuition plan, commonly known as a 529 plan, for your child. It could help ensure you have funds available to pay for their college education down the road. Qualified tuition plans come in two general types: Education savings plans, which only states can offer, and prepaid tuition plans that states and qualified educational institutions offer.

Investing in your child’s education with a 529 college savings plan has its advantages, which may also include some tax benefits. Plus, changes to the tax code have added elementary and secondary school costs to the list of education-related expenses you can pay with money from a 529 college savings plan.

In this article, we’ll take an in-depth look at the pros and cons of a 529 college savings plan to help you decide if this is the right investment account for your family.

What is a 529 college savings plan?

Sponsored by states, 529 college savings plans are tax-advantaged investment accounts that allow you to invest money toward your child’s education. Generally, you can choose to invest your 529 college savings plan contributions in investment options like mutual funds, exchange-traded fund portfolios or bank products.

As state-sponsored plans, some 529 college savings plans may have residency requirements. As a result, your state’s 529 plan rules may require you to use the funds at a college or university within the state that sponsored the plan. Or you may be required to live in the sponsoring state in order to open the account. Not all 529 college savings plans have these stipulations, so do your research beforehand.

Pros of 529 plans

We’ll start by talking about the many pros of 529 plans. 529 plans are one of the most popular options for parents who want to start saving for college for their children, and here are some of the reasons why.

Tax-free growth

Tax-free growth is one of the biggest benefits of choosing a 529 plan. Many investment accounts have their earnings taxed upon withdrawal, but that’s not the case with a 529 plan. As long as you use the earnings from a 529 plan for qualifying education expenses, they can be withdrawn by your child tax-free.

Contribute more money

Another benefit to choosing a 529 college savings plan is the fact that you can contribute significantly more than you can with a Coverdell Education Savings Account. With ESAs, you can contribute a maximum of $2,000 per child, per year. With a 529 plan, there are no yearly contribution limits. However, contributions may be subject to the gift tax is you designate more than the gift tax exclusion, which is $17,000 for 2023, for any single beneficiary in a tax year.

Financial aid eligibility

Different types of assets get treated differently when it comes to financial aid eligibility, but a 529 plan has a minimal effect on the financial aid eligibility of your child.

A 529 plan is treated as the parents’ asset, which means only 5.64% of the value of the account counts against your child’s financial aid eligibility. This is especially important if your 529 plan is only going to pay for a small portion of college.

Tax breaks

529 college savings plans are not subject to federal taxes, according to the Internal Revenue Service (IRS). Depending on what state you’re in, you may qualify for tax breaks at the state level when you contribute to a 529 plan. These tax breaks can help you get even more out of your 529 plan investment, but they’re not applicable in every state.

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Applicable to K-12 expenses

Most people think of 529 plans as college savings plans, but you can actually use them for other education expenses as well, including for qualifying K-12 education expenses.

Can go toward student loan debt

There’s a lot to consider when it comes to the cost of education expenses, including the student loan debt your child may have to repay when they’re finished with college. Fortunately, your child can use the earnings from a 529 plan to pay student loan debt without paying taxes on those earnings.

It’s important to keep in mind that beneficiaries can withdraw a maximum of $10,000 in their lifetime to pay off student loan debt. Still, this can help your child get a head start on paying off their debt.


If one of your children decides they’re not going to college, a 529 plan gives you the ability to transfer the plan to another child. There are no federal taxes when transferring a 529 plan to qualifying members of the beneficiary’s family.


There are two types of 529 plans you can choose between — education savings plans and prepaid tuition plans. In this article, we’ve mostly been talking about education savings plans, which allow you to invest money that grows tax-free and withdraw that money to help cover qualifying education expenses.

With a prepaid tuition plan, you can purchase college credits at their current price that your child can use when they go to college. Since college credit costs may fluctuate, you can purchase these for less money than they will be when your child goes to college.

Cons of 529 plans

While 529 plans can help cover education expenses and support your child’s living expenses during college, there are disadvantages to these plans as well. While these disadvantages are generally considered to be fairly minor, you may want to weigh both the pros and cons of a 529 plan before deciding if it’s right for you.

Must only be used for education

First off, you must use 529 earnings to pay for education for your child to withdraw the money tax-free. Only certain education expenses qualify, so you need to make sure you’re withdrawing money for qualifying expenses to avoid taxes.

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If you use 529 savings plan funds for non-qualified withdrawals, they may incur a 10% penalty. And they may be subject to federal income tax.

Tax benefits don’t apply to every state

While some states do offer tax breaks for contributing to a 529 plan, there are lots of states that don’t offer these tax breaks. Depending on where you live, you may not be eligible for tax breaks for contributing to a 529 plan.

Limited control on how money gets invested

If you’re interested in investing on your own without the help of an advisor, a 529 plan may not be right for you. 529 plans don’t allow for self-directed investments, meaning you don’t get as much control over what you’re investing in.

Fewer investment options

Speaking of investing with a 529, your investment options are limited. With an education savings plan, you can invest in pretty much all securities, including stocks, bonds and mutual funds.


There are fees for many 529 plans. Some 529 plans come with a flat fee that you pay annually, while others charge a percentage of the total account balance. There may also be an upfront fee if you work with a broker to start a 529 plan.

When to start a 529 college savings plan

You can open a college savings plan at any time. Keep in mind, however, that the younger your child is when you open the account, the more time your investment will have to grow before you start withdrawing.

Just like saving for retirement, the magic of compound interest makes putting aside money early on very advantageous. For example, putting aside $200 a month for 18 years can amount to almost $97,000, given an interest rate of 8%.

Opening a 529 college savings plan

Do some comparison shopping of different states’ options, especially checking what tax benefits your own state offers.

Establish your plan directly with the state, known as a direct-sold plan, rather than through an advisor or broker, saving you the fees brokers charge. You may find that direct-sold plans for your state have lower fees. Additionally, your state may waive fees for state residents, those who keep high balances, those who opt for paperless statements or those who make regular contributions. Check to see what your state offers.

With state-sponsored 529 college savings plans, the state usually selects one administrator. Typically, the administrator is a large, well-known brokerage — like Vanguard or Fidelity — that will manage your investments.

Once you choose a 529 college savings plan, you’ll need your child’s Social Security number and birthdate to open the account. You may have to pay an enrollment or application fee when you set up via a direct-sold plan or a plan with a broker. You may also need to make an initial contribution.

What’s more, there may be other fees associated with your 529 college savings plan, including:

  • Account maintenance
  • Program management
  • Asset management

Once you begin contributing, you can select your risk profile. Once your child nears college age, you can consider opting for a less-risky portfolio. Many plans adjust your portfolio automatically based on age to reduce volatility. If you are looking for someone to help guide your investments, it may be worth going through an advisor and facing the management fees.

What education expenses can I pay for with a 529 college savings plan?

Qualified education expenses at eligible institutions can include the following:

  • School tuition
  • Room and board (if enrolled at least half-time and included in the cost of attendance)
  • Fees
  • Books and supplies
  • Equipment the school requires
  • Computers and internet service
  • Computer peripherals (such as printers)
  • Education software

Is a 529 savings plan right for you?

Helping your child save for college and understand managing money after college can help prepare them for the future, but every family is different when it comes to college savings. So, is a 529 savings plan right for you?

529 savings plans can be an effective way to save for college, as long as you use the earnings to pay for qualifying education expenses.

Ultimately, everybody has different needs when it comes to saving for college. If you need help deciding if a 529 plan is right for your family, consider scheduling a consultation with a financial advisor.

Bottom line: Start saving early

Opening a 529 college savings plan for your baby can be a great way to save toward their eventual college education costs. The money you put in a 529 plan can grow tax-free. Plus, if you use the money for qualified education expenses at qualified educational institutions, you may avoid taxes on the withdrawals.

Thanks to changes in the tax code, it’s now possible to put 529 college savings plan funds toward elementary and secondary school expenses.

Keep in mind that, as with any investment, gains are not guaranteed. So your investment could lose money.

However, Curley of ISS Market Intelligence emphasizes the importance of automating your investment contributions to help you successfully save.

“Consider automatically saving with a 529 college savings plan through payroll deduction or from your bank account, which is what 36% of account holders did last year,” he says. “That way, automatic money going in can help you get to where you want to go regardless of market returns.”