personal finance  |  march 22, 2023

529 Plans Can Help You Save for College Even in Uncertain Times

The long-term impact of the pandemic on higher education remains to be seen, raising questions for prospective students and their parents.


Key Insights

  • Saving for college in a 529 plan can add predictability to an otherwise uncertain situation.

  • Saving early and regularly can increase your flexibility when choosing among schools.

  • If you aren’t able to save 100% of your children’s future education costs, payments from current income, loans, grants, and scholarships can help make up the difference.

Roger Young, CFP®

Thought Leadership Director

The coronavirus pandemic has changed the landscape of higher education. The pivot to remote learning introduced new possibilities for the way colleges deliver education—and new considerations for prospective students about how to conduct their studies.

The shift to virtual schooling, alongside acute awareness of the rising cost of higher education, has led to speculation about fundamental changes that could alter the current model at four-year residential colleges and universities.1 It also raises the question of what costs might be without traditional in-person instruction or room and board.

As with many areas of uncertainty, it’s important to understand what lies within your control. When it comes to paying for college, saving as much as you can is one of the few ways to provide a solid basis for decision-making. According to Roger Young, CFP®, a thought leadership director with T. Rowe Price, “529 plans remain the best way to reduce uncertainty about paying for college, thanks to tax-free potential growth.”

The Actual Cost of a College Education is Hard to Predict

College tuition continues to increase. For the 2022–2023 academic year, the average total tuition, fees, room and board, and other related costs ranged from $27,940 at in-state, public four-year institutions to $57,570 at private four-year institutions.2 Because that range is so wide, and financial aid packages can be unpredictable, it’s important for parents and prospective students to consider a range of options. There is likely a limit to what you’re willing or able to pay for a child’s education. Make sure your child applies to at least one or two schools that you’re confident you can afford. Taking that step will improve the odds of finding the right fit, both academically and financially. In a post-pandemic environment, that could mean considering schools that offer remote instruction or a hybrid model at potentially lower costs.

The Growth Potential of a 529 Plan

A 529 plan offers the potential of higher returns and tax-advantaged growth compared with bank savings accounts. If you consider saving $2,500 a year in a bank account versus investing that same amount in a 529 plan, you could accumulate about $27,000 more over 18 years.

Comparing the potential growth of college savings in a 529 plan versus a traditional savings account.

*This example shows the potential difference between 2 common ways to save for college—saving in a traditional savings account and in a 529 college savings plan. The chart assumes a hypothetical interest rate of 1.95% in the savings account and a hypothetical 6% rate of return in the 529 savings plan account compounded annually. This example doesn’t represent the return on any particular investment. It demonstrates the hypothetical difference between a 1.95% return and a 6% return but not between any 2 specific products. These rates are not guaranteed. Unlike a traditional bank account that offers Federal Deposit Insurance Corporation (FDIC) protection, investments in 529 plans are generally not guaranteed, and you could lose money, including your principal, by investing in them. There may be other material differences between savings accounts and 529 plan accounts that should be considered prior to investing.

529 Plans Are a Useful Vehicle for Education Savings

As parents and students consider their postsecondary options, the best course of action is to save as much as possible as early as possible. Earnings in 529 plans are tax-deferred, and you won’t pay federal income taxes on distributions if they’re used for qualified educational expenses such as tuition and fees; room and board; books, supplies, and equipment required for enrollment or attendance; and computer and technology needs.3 Investment decisions can be simplified under 529 plans, which have portfolios that adjust asset allocations based on a student’s target enrollment date, becoming less aggressive as college approaches. “As with other long-term investment goals, saving early—even if it’s only a little bit at a time—helps maximize the opportunity for growth,” says Young.

Parents with the means to save more money can take advantage of another benefit related to 529 accounts: You can make a one-year contribution of up to five times the maximum annual amount allowed by the IRS under the gift tax exclusion (for 2023, that means $17,000 multiplied by five, or up to $85,000 in total). As long as you don’t make any additional contributions or gifts over the next four years, you can avoid paying gift taxes or using the lifetime gift exemption. It’s also important to note that anyone can contribute to a 529 on a child’s behalf, so grandparents, other relatives, and even close family friends may use them to give the gift of education.

Families fortunate enough to have more savings than they need have options as well. If a child receives scholarships, families can take penalty-free withdrawals from 529 accounts for an equivalent amount (although income taxes will still be assessed). Proceeds from 529s also can be used tax- and penalty-free to cover student loan payments for the beneficiary, up to a $10,000 lifetime maximum. It’s also possible to change the beneficiary of a 529 plan to another family member, including yourself. The funds can even be used to cover up to $10,000 per year worth of elementary and secondary public, private, and religious school tuition expenses.4 Starting in 2024, investors will be able to roll over funds from a 529 plan that has been open for at least 15 years to a Roth individual retirement account (IRA) for the beneficiary. This will be subject to various rules, including, but not limited to, the regular annual IRA contribution limit plus a $35,000 lifetime maximum.5

If you’re concerned about saving too much and paying penalties on the earnings portion of nonqualified withdrawals, consider starting with a 529 plan and supplementing those savings with investments in a taxable brokerage account.

Focus on Controlling What You Can

It’s not necessary to save enough to cover a child’s entire college education expenses in a 529 plan. Young advises families to start saving for a child’s education as soon as possible, with an amount they can afford while keeping other potential funding methods in mind. Over time, increasing contributions can expand the feasible set of education options—while limiting debt to an appropriate level. A college savings calculator can help families plan for and evaluate college funding scenarios.

In addition, virtually all schools offer a net price calculator. These tools show the college’s cost of attendance, as well as an estimated package of grants, loans, and other financial aid based on a family’s financial circumstances and a student’s level of academic success. These estimates can help families identify colleges clearly within their budget, as well as those that could work under the right aid circumstances.

The world has changed in many ways over the past three years, but higher education will likely remain a significant financial goal for most families. It is risky to count on dramatic reductions in college costs or future forgiveness of student loans.

By saving what you can, it’s possible to reduce the uncertainty in an already challenging decision-making process. “The less you and your child have to worry about how to pay for their education, the more you can both focus on getting the most out of college,” says Young.

A 529 college savings plan’s disclosure document includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. You should review the 529 plan offered by your home state or your beneficiary’s home state and consider, before investing, any state tax or other state benefits, such as financial aid, scholarship funds, and protection from creditors, that are only available for investments in such state’s 529 plan.

1March 2020, Harvard Business Review, “What the Shift to Virtual Learning Could Mean for the Future of Higher Ed.”
22022, College Board, “Trends in College Pricing and Student Aid 2022.
3The availability of tax benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors as applicable.
4While qualified distributions from 529 plans for K–12 tuition expenses are federally tax-free, state tax treatment will vary and could include state income taxes assessed, the recapture of previously deducted amounts from state taxes, and/or state-level penalties.
5Please note that the industry is currently awaiting guidance from the IRS on several provisions of this new law.

Important Information

This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

View investment professional background on FINRA's BrokerCheck.



Next Steps