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A Guide to 529 College Savings Plans

Ben Luthi
529 college savings plan
529 college savings plan

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It’s that quick & easy — really. Our free tool checks a network of top refinance lenders and shows you options in one easy chart.

Checking rates takes 2 minutes with no impact on your credit
Federal & private loans are eligible
No maximum loan amount

Saving for college has become a monumental task for parents. Over the last 30 years, the average cost of tuition and fees increased from $4,160 to $10,740 at public four-year institutions, according to CollegeBoard (and that’s adjusted for inflation). 

For parents who can afford to save, 529 plans can offer the chance to set aside some cash for future educational expenses — and take advantage of tax benefits along the way.  

That said, 529 plans have some limitations that you’ll want to keep in mind before you get started. Here’s everything you need to know about 529 plans for college. 

What is a 529 plan? 

There are two types of 529 plans: prepaid tuition plans and college savings plans. Here’s a quick summary of how they work. 

529 prepaid tuition plan 

This type of 529 plan allows you to prepay future tuition costs for your child, generally with an in-state public college or university. You can buy individual college credits at a certain rate, and regardless of what tuition costs are when your child enters college, they’ll be covered. 

Prepaid tuition plans don’t include funds for room and board, supplies or other expenses, though. And if your child opts to leave the state for school or to attend a private institution, you won’t get guaranteed tuition, but you’ll likely get an amount equal to the average tuition and fees at the home state’s public schools. 

Unlike 529 college savings plans, you must be a resident of the state offering a prepaid tuition plan to be eligible. Currently, only nine states offer 529 prepaid tuition plans to non-residents, including Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas and Washington. 

529 college savings plan 

A 529 college savings plan is essentially a tax-advantaged investment account that allows you to save specifically for educational expenses. Parents and other family members can contribute money and watch it grow tax-free until their child needs the funds. 

The account owner can withdraw funds on a tax-free basis, as long as they’re used for qualified education expenses, which can include tuition and fees, room and board, textbooks, supplies and more. Parents can also use 529 plan funds to pay for up to $10,000 in K-12 tuition expenses, and even up to $10,000 in student loan debt after the child has graduated. 

If you take a distribution for non-qualified expenses, you may incur a 10% penalty on the withdrawal and you’ll be subject to income taxes on the gains portion of the withdrawal. 

529 plans don’t have annual contribution limits, but contributions that exceed $16,000 per parent are considered gifts for tax purposes and may impact their tax situation in the future. 

Nearly every state offers a 529 college fund option, but you don’t have to be a resident of a specific state to open an account. However, some states offer tax deductions and credits on contributions, and you have to be a resident of that state to take advantage of that benefit. 

If your state doesn’t offer these tax breaks, you can shop around to find the best 529 college savings plan for you. 

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What are the benefits of a 529 college fund? 

Depending on the type of plan you get, there are many benefits to be had, both for you and your child: 

  • You’ll get tax benefits: If you were to invest for college expenses in a brokerage account, you’d have to pay taxes on the gains no matter what. However, with a 529 prepaid tuition plan, your guaranteed tuition rate is not taxable, and your money will grow tax-free as long as you use the funds for qualified expenses. What’s more, some states offer additional tax benefits on contributions in the form of a deduction or credit. 
     
  • You can shop around for savings plans: While you need to be a resident of the state offering a prepaid tuition plan, you have the option to compare savings plans from multiple states to determine which one offers the best investment options and the lowest fees. 
  • Prepaid tuition plans lock in tuition costs: Tuition costs have increased at a much faster rate than inflation in the past few decades, and it’s difficult to know what they’ll be like when your child is old enough to attend college. With a prepaid plan, you don’t have to stress about that — simply pay the current rate for credits, and as long as your child attends an in-state public school, they’ll be covered. 
     
  • You can change the beneficiary: If your child decides not to attend college, they obtain scholarships or they want to attend in another state and you have a prepaid plan, you can change the beneficiary on your plan to another child. 

What are the drawbacks of a 529 savings plan? 

While there are some clear advantages to using a 529 plan to save for your child’s education, there are also some disadvantages to consider before you start saving. 

  • Fees can be high: Depending on the type of plan you choose, the fees can eat into the value you’re gaining by investing in a tax-advantaged education account. 
     
  • You may be required to make minimum contributions: With 529 college savings plans, some states require that parents make a minimum contribution every month. If you want more control over when you contribute, you may want to look elsewhere. 
     
  • You may incur penalties for non-qualified withdrawals: With a college savings plan, you’ll typically incur a 10% penalty from the IRS, plus income taxes on your gains, if you take out money for non-qualified expenses. There are some exceptions, though. More on those in a bit. 
     
  • You may receive less financial aid: When your child fills out the Free Application for Federal Student Aid (FAFSA), they’ll need to include parent-owned 529 plan funds as assets — even if the child isn’t the beneficiary — which can impact how much federal aid they qualify for. 

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How can funds be spent? 

If you have a 529 prepaid tuition plan, the funds go directly toward the cost of tuition. However, 529 college savings plans offer more flexibility. Here are some of the eligible expenses for that type of plan: 

  • Tuition and fees 
  • Room and board 
  • Textbooks 
  • Supplies 
  • Equipment 
  • Computers 
  • Special needs expenses 
  • K-12 tuition costs (up to $10,000 per year) 
  • Student loan payments (up to $10,000) 

If you withdraw funds for other purposes, there may be a 10% penalty, and you’ll also need to pay income taxes on the gains portion of the withdrawal.  

There are exceptions to the 10% penalty, though, such as when your child receives a scholarship. In this case, you can withdraw up to that amount and only pay taxes on your gains. Other exceptions include if the beneficiary dies or becomes disabled, receives educational assistance through a qualified employer program, is attending a military academy, or is using the funds to claim another educational tax benefit. 

If your child doesn’t need all the funds, you can change the beneficiary to a different child. You can also roll over a 529 plan to a different one, including from a prepaid plan to a savings plan, as long as the beneficiary remains the same. 

Maximize your savings and other free college funding sources 

If you want to help your child pay for college, a 529 plan is one of the best ways to do it. However, if you don’t find the drawbacks appealing, you could instead opt for a brokerage account, a Roth IRA, or a custodial account. 

Regardless of which approach you take to saving for college, it’s important to have a strategy and make it a priority in your financial plan. Additionally, you’ll want to encourage your child to explore other funding sources that don’t require repayment. Examples include: 

  • Scholarships and grants: Fill out the FAFSA to determine eligibility for federal grants and have your child contact their school to find out about scholarship opportunities. They can also use databases like Scholarships.com and Fastweb to apply for private scholarships and grants.
  • Work: If it doesn’t conflict with their coursework, encourage your child to work part-time while attending school. They can also work full-time during the summer to prepare for the upcoming school year.  

If borrowing money is necessary, encourage your child to apply for federal student loans first. These loans typically don’t require a credit check, and they can offer low interest rates and fees, particularly if your child is an undergraduate student. They also offer long-term benefits, including access to forgiveness programs and income-driven repayment plans. 

If your child still has expenses after they’ve exhausted all of their other options, private student loans can help them bridge the gap. In this case, lenders do require a credit check, so you may need to help by cosigning the loan application. Consider letting Purefy help you shop around and compare private student loans to ensure that you get the loan with the best interest rates, repayment terms and other features. 

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Earnest Rate Disclosure

Rates displayed include the 0.25% Auto Pay discount. You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.67% APR to 16.15% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.64% APR to 16.45% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan origination loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school.

Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.

Loan Eligibility criteria: Eligible students must: 1) For college Freshmen, Sophomores and Juniors, attend, or be enrolled to attend, a Title IV school full-time. For college Seniors and Graduate students, attend, or be enrolled to attend, a Title IV school at least half-time; and 2) be pursuing a Bachelor’s or Graduate degree. Earnest private student loans are subject to credit qualification, completion of a loan application, verification of application information, self-certification of loan amount, and school certification.

Responsible borrowing tip: Explore all scholarship, grant and federal options before applying for a private loan.

Earnest Private Student Loans are made by One American Bank, Member FDIC. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104.

Earnest loans are serviced by Earnest Operations LLC, 535 Mission St., Suite 1663 San Francisco, CA 94105, NMLS #1204917, with support From Navient Solutions, LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.

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THIS IS AN ADVERTISEMENT. YOU ARE NOT REQUIRED TO MAKE ANY PAYMENT OR TAKE ANY OTHER ACTION IN RESPONSE TO THIS OFFER.

ELFI Rate Disclosure

Education Loan Finance is a nationwide student loan provider offered by Tennessee based SouthEast Bank. ELFI is designed to assist students financially with receiving their education. Subject to credit approval. See Terms & Conditions. Interest rates current as of 12/11/2023. Variable interest rates may increase after closing but will never exceed 18.00%. Interest rates may also differ from the rates shown above. The term of your loan, financial history, and other factors, including your cosigner’s (if any) financial history can affect the interest rate. For example, a 10-year loan with a fixed rate of 7% would have 120 payments of $11.61 per $1,000 borrowed. Rates are subject to change.

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College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC.. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. If a payment is returned, you will lose this benefit. Variable rates may increase after consummation.
Minimum loan amount $1,000, as certified by your school and less any other financial aid you might receive.
This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 1/1/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

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Ascent’s undergraduate and graduate student loans are funded by Bank of Lake Mills or DR Bank, Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentStudentLoans.com/Ts&Cs.

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Fixed rates range from 4.49% APR to 8.99% APR with a 0.25% autopay discount. Variable rates from 5.09% APR to 8.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

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Actual rate and available repayment terms will vary based on your income. Fixed rates range from 5.44% APR to 9.99% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.97% APR to 9.99% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.

Advertiser Disclosure:

THIS IS AN ADVERTISEMENT. YOU ARE NOT REQUIRED TO MAKE ANY PAYMENT OR TAKE ANY OTHER ACTION IN RESPONSE TO THIS OFFER.

Earnest Rate Disclosure

Rates displayed include the 0.25% Auto Pay discount. You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.67% APR to 16.15% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.64% APR to 16.45% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan origination loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school.

Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.

Loan Eligibility criteria: Eligible students must: 1) For college Freshmen, Sophomores and Juniors, attend, or be enrolled to attend, a Title IV school full-time. For college Seniors and Graduate students, attend, or be enrolled to attend, a Title IV school at least half-time; and 2) be pursuing a Bachelor’s or Graduate degree. Earnest private student loans are subject to credit qualification, completion of a loan application, verification of application information, self-certification of loan amount, and school certification.

Responsible borrowing tip: Explore all scholarship, grant and federal options before applying for a private loan.

Earnest Private Student Loans are made by One American Bank, Member FDIC. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104.

Earnest loans are serviced by Earnest Operations LLC, 535 Mission St., Suite 1663 San Francisco, CA 94105, NMLS #1204917, with support From Navient Solutions, LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.

Advertiser Disclosure:

THIS IS AN ADVERTISEMENT. YOU ARE NOT REQUIRED TO MAKE ANY PAYMENT OR TAKE ANY OTHER ACTION IN RESPONSE TO THIS OFFER.

ELFI Rate Disclosure

4 ELFI Rate Disclosure:

Education Loan Finance is a nationwide student loan debt consolidation and refinance program offered by Tennessee based SouthEast Bank. ELFI is designed to assist borrowers through consolidating and refinancing loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. See Terms & Conditions. Interest rates current as of 10/13/2023. The interest rate and monthly payment for a variable rate loan may increase after closing, but will never exceed 9.95% APR. Interest rates may be different from the rates shown above and will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. Rates are subject to change.

ELFI Rate Disclosure

Education Loan Finance is a nationwide student loan provider offered by Tennessee based SouthEast Bank. ELFI is designed to assist students financially with receiving their education. Subject to credit approval. See Terms & Conditions. Interest rates current as of 12/11/2023. Variable interest rates may increase after closing but will never exceed 18.00%. Interest rates may also differ from the rates shown above. The term of your loan, financial history, and other factors, including your cosigner’s (if any) financial history can affect the interest rate. For example, a 10-year loan with a fixed rate of 7% would have 120 payments of $11.61 per $1,000 borrowed. Rates are subject to change.

College Ave Rate Disclosure

College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC.. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. If a payment is returned, you will lose this benefit. Variable rates may increase after consummation.
Minimum loan amount $1,000, as certified by your school and less any other financial aid you might receive.
This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 1/1/2024. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

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