Should You Start a 529 Plan?
- A 529 savings plan for education may save you money on state income taxes.
- Some employers match 529 contributions.
- The money in a 529 plan must be spent on qualified education costs.
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Whether you are preparing for a baby or already have children, sending your little one(s) to college may already be in the back of your mind. Since tuition costs are rising and parents want to send their kids to the best school possible, saving for college has become even more important.
As college costs have risen, more Americans have turned to student loans to help pay for their education. According to the Education Data Initiative, as of 2024 the average student loan debt was $38,375. Many people with student loans end up in need of debt relief down the road. If you want to help your child avoid that path, and manage costs without racking up too much student loan debt, it might be a good idea to start a 529 plan.
Wondering what a 529 plan is and how you might use one to help you put your kids through college? Read on to better understand saving for college with a 529 savings plan.
What Is a 529 Plan?
A 529 college savings plan is an investment account you can use to pay for qualified education expenses. These plans are usually state-sponsored. Some offer some state-level tax benefits. Anyone can start a 529 plan, including parents, grandparents, friends, or other relatives. Whoever opens the 529 account and contributes money to the account may gain tax benefits if their state offers a state tax deduction for 529 contributions.
Contributions to a 529 plan do not receive a federal tax deduction like a 401(k) or traditional IRA. In some cases, your employer may offer a matching program with a 529 plan, and those contributions are also taxed upfront.
But along with a possible state income tax deduction, your 529 plan money has one other big tax advantage: The savings in the 529 account grow tax-deferred. This means you don’t have to pay taxes on the investment gains as your account balance grows over time. You may then withdraw the funds tax-free, as long as the money is used for qualified education expenses.
Qualified education expenses
According to the IRS, a qualified education expense is any expense required for enrollment or attendance at an eligible institution. Qualified education expenses include:
Tuition and fees
Room and board
Student activity fees
Books and supplies
Equipment such as laptops, printers, or software
Room and board expenses can be covered by money from a 529 plan if the student’s housing is owned or operated by the school. If a student lives off-campus, you can use up to the allowance for room and board as determined by the school. For example, if the school determines $9,500 is the cost of room and board for the year, you could use up to $9,500 in a 529 plan for off-campus housing.
Two Types of 529 Plans
There are two types of 529 plans, including prepaid tuition plans and education savings plans. There are advantages, drawbacks, and requirements for each, so you’ll want to make sure you understand the differences.
Education savings plans
This is the typical 529 plan that allows the owner to contribute to an investment account to save for the beneficiary’s qualified education expenses. These 529 plans are not only for college—you can use the money for qualified post-secondary institutions (including vocational schools), and even for K-12 expenses. The investment grows tax-deferred over time, and withdrawals are tax-free when used for the qualified expenses.
With any investment account, there’s a risk of loss. When you have a regular brokerage account or mutual fund, if your investments lose value, you could wait until they rebound before you withdraw the funds. With a 529 education savings plan, you might not have the option to wait. When your child is ready to start school, you might need to withdraw the money that year. In this way, you could be forced to lock in losses.
Another drawback is that if you use the plan for K-12 expenses, there’s much less time to contribute and let your money grow, even if you start very early in the child’s life.
Prepaid tuition plans
This type of 529 plan is only offered by a few states. Instead of an investment account, the prepaid tuition 529 plan allows the owner to purchase credits or units at participating universities or colleges in advance.
The advantage is that you lock in today’s tuition rates, even though the beneficiary won’t attend college until many years later. One drawback is you can’t use the plan to pay for future room and board.
If you live in a state with excellent public colleges and universities, a prepaid tuition plan could significantly reduce the cost of your child’s attendance there.
However, if your child chooses to attend a college or university that’s not on the list (or not go to college at all), the prepaid tuition plan is likely to hold little or no value. It may pay a very small return on your original investment, like what you could expect from a big bank savings account (typically around one tenth of one percent). At that rate, your money wouldn’t even be keeping up with inflation.
Which States Offer a Tax Benefit for 529 Plan Contributions?
Not all states offer a tax benefit for in-state contributors, but if you live in a state that doesn’t offer a tax deduction, you can still open a 529 plan with an investment company of your choice. If your state offers a tax benefit, it’s probably worth signing up for your state’s plan. Here is a comprehensive list:
| State | Offers tax benefit for in-state contributors? |
|---|---|
| Alabama | Yes |
| Alaska | No |
| Arizona | Yes, and also to any 529 plan* |
| Arkansas | Yes, and also to any 529 plan* |
| California | No |
| Colorado | Yes |
| Connecticut | Yes |
| Delaware | No |
| District of Columbia | Yes |
| Florida | No |
| Georgia | Yes |
| Hawaii | No |
| Idaho | Yes |
| Illinois | Yes |
| Indiana | Yes |
| Iowa | Yes |
| Kansas | Yes, and also to any 529 plan* |
| Kentucky | No |
| Louisiana | Yes |
| Maine | Yes, and also to any 529 plan* |
| Maryland | Yes |
| Massachusetts | Yes |
| Michigan | Yes |
| Minnesota | Yes, and also to any 529 plan* |
| Mississippi | Yes |
| Missouri | Yes, and also to any 529 plan* |
| Montana | Yes, and also to any 529 plan* |
| Nebraska | Yes |
| Nevada | No |
| New Hampshire | No |
| New Jersey | No |
| New Mexico | Yes |
| New York | Yes |
| North Carolina | No |
| North Dakota | Yes |
| Ohio | Yes, and also to any 529 plan* |
| Oklahoma | Yes |
| Oregon | Yes |
| Pennsylvania | Yes, and also to any 529 plan* |
| Rhode Island | Yes |
| South Carolina | Yes |
| South Dakota | No |
| Tennessee | No |
| Texas | No |
| Utah | Yes |
| Vermont | Yes |
| Virginia | Yes |
| Washington | No |
| West Virginia | Yes |
| Wisconsin | Yes |
| Wyoming | No state plan |
Investment Companies That Offer 529 Plans
Plenty of investment companies offer 529 plans to help you save for college. The benefit of using an investment company’s 529 plan is that you have more flexibility in how to invest your money. For example, if your state plan uses TIAA funds but you prefer Vanguard funds, you can open your 529 plan with Vanguard directly.
A few investment companies that offer 529 plans include:
Vanguard
TD Ameritrade
Fidelity
USAA
Merrill
Who Can Be a 529 Plan Beneficiary?
When you start a 529 plan, you can set it up to save for (and pay for) the future education of a person of your choice, the “beneficiary.” The beneficiary of a 529 account can be a child, grandchild, family member, or a friend. You can even open a 529 plan for yourself, and use the money for your own education expenses. If you want to save for a child who’s not yet born, you can open the 529 plan in your name, then transfer the account once your baby arrives.
If you decide to change the beneficiary of a 529 plan, you can only transfer the funds to a member of the beneficiary’s family. The definition of “member of the family” is broad and includes:
Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
Brother, sister, stepbrother, or stepsister
Father or mother or ancestor of either
Stepfather or stepmother
Son or daughter of a brother or sister
Brother or sister of father or mother
Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
The spouse of the beneficiary or any individual listed above
First cousin
Can I Use a 529 Plan to Pay for Elementary and Secondary Education?
If you are wondering if the cost of attending college is worth it, you should know that 529 plans are not just for paying for college. These plans can also be used to pay for some K-12 education expenses. If you decide not to save for a college education, a 529 plan makes it possible for parents to cover education expenses for an earlier stage of education.
You can use up to $10,000 per student per year towards K-12 tuition and fees at a qualifying public, private, or religious school. Books, supplies, computers, and internet access are not qualifying expenses for K-12 schools.
Saving for College Starts with Managing Your Money
Before you can start a 529 plan, make sure you’ve caught up on your debts and can manage all of your other bills. If you’re struggling with unpaid debts, consider getting debt relief. Credit counseling or debt settlement can help you build a more stable foundation for your finances before you open a 529 plan.
Debt relief stats and trends
We looked at a sample of data from Freedom Debt Relief of people seeking a debt relief program during May 2025. The data uncovers various trends and statistics about people seeking debt help.
Credit utilization and debt relief
How are people using their credit before seeking help? Credit utilization measures how much of a credit line is being used. For example, if you have a credit line of $10,000 and your balance is $3,000, that is a credit utilization of 30%. High credit utilization often signals financial stress. We have looked at people who are seeking debt relief and their credit utilization. (Low credit utilization is 30% or less, medium is between 31% and 50%, high is between 51% and 75%, very high is between 76% to 100%, and over-utilized over 100%). In May 2025, people seeking debt relief had an average of 74% credit utilization.
Here are some interesting numbers:
| Credit utilization bucket | Percent of debt relief seekers |
|---|---|
| Over utilized | 30% |
| Very high | 32% |
| High | 19% |
| Medium | 10% |
| Low | 9% |
The statistics refer to people who had a credit card balance greater than $0.
You don't have to have high credit utilization to look for a debt relief solution. There are a number of solutions for people, whether they have maxed out their credit cards or still have a significant part available.
Personal loan balances – average debt by selected states
Personal loans are one type of installment loans. Generally you borrow at a fixed rate with a fixed monthly payment.
In May 2025, 44% of the debt relief seekers had a personal loan. The average personal loan was $10,718, and the average monthly payment was $362.
Here's a quick look at the top five states by average personal loan balance.
| State | % with personal loan | Avg personal loan balance | Average personal loan original amount | Avg personal loan monthly payment |
|---|---|---|---|---|
| Massachusetts | 42% | $14,653 | $21,431 | $474 |
| Connecticut | 44% | $13,546 | $21,163 | $475 |
| New York | 37% | $13,499 | $20,464 | $447 |
| New Hampshire | 49% | $13,206 | $18,625 | $410 |
| Minnesota | 44% | $12,944 | $18,836 | $470 |
Personal loans are an important financial tool. You can use them for debt consolidation. You can also use them to make large purchases, do home improvements, or for other purposes.
Support for a Brighter Future
No matter your age, FICO score, or debt level, seeking debt relief can provide the support you need. Take control of your financial future by taking the first step today.
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Author Information
Written by
Justine Nelson
Justine Nelson is the founder of Debt Free Millennials, an online community to help millennials eliminate debt and live a debt free lifestyle. As a freelance writer and YouTuber, Justine enjoys creating upbeat and educational personal finance content. This Midwest millennial paid off $35k in student loan debt and now resides in San Diego with her husband.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
Is a 529 plan really worth it?
If you’re serious about saving money for your child (or other loved one) to help pay for future college costs, starting a 529 plan can be worth it. It gives you a savings account dedicated to college or other qualifying education expenses.
And there can be some state income tax deductions, depending on where you live. This can give you extra motivation to save money for college. You could also ask family members to contribute to your child’s account when holidays and birthdays roll around.
What is the biggest downside to a 529 plan?
When you apply for federal financial aid using the FAFSA (Free Application for Federal Student Aid), having a 529 account could reduce the amount of federal financial aid your student qualifies for. However, these calculations are complicated, and every family’s situation is different. Federal financial aid rules are always changing, and it’s uncertain how big a difference it really makes. You might ask yourself if you would rather have an extra $10,000 saved in a 529 account, or have $0 saved and have to take out an extra $10,000 in student loans.
What is the best age to start a 529 plan?
The best age to start a 529 plan is right after your baby is born, as soon as they have a Social Security Number. Starting your investments when your child is at a young age can give your money more time to grow.