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Guide to 529 Plans

What Is a 529 Plan & How It Works
Jennifer Calonia
Jennifer CaloniaUpdated March 16, 2023
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With the average amount of student loan debt that students must face after graduation, preparing for this costly milestone way ahead of time can help minimize the burden. The 529 education plans are a solution for students’ families who want to help their child pay for college using a tax-advantaged approach. 

What Is a 529 Plan?

A 529 plan, officially called a qualified tuition plan, is an education savings vehicle for college-bound students and their families. According to Education Data, families saved an average of $28,953 in 529 savings plans. Setting money aside in a 529 plan can help students avoid reliance on costly financial aid options, like taking on student loan debt.

Prepaid Tuition Plan

There are two types of 529 plans. The first is called a prepaid tuition plan. This 529 savings plan lets the account holder—typically a parent or relative of the beneficiary student— purchase tuition units or credits in advance toward the beneficiary’s future tuition and mandatory fees.  And the advantage is that you’re prepaying tuition based on today’s rate, instead of potentially increased tuition prices later on.

Education Savings Plan

The other type of 529 plan is called an education savings plan. Education savings plans are an investment account set up by a parent or relative of the beneficiary. Account owners are generally free to choose a plan from any state, regardless of their or the beneficiary’s residency, as long as they meet the plan’s other requirements. However, some plans require you to be a state resident.This kind of 529 plan allows account holders to put savings in various investment vehicles, like exchange-traded funds and mutual funds. Once the beneficiary is ready to enroll in college, the savings can be used to pay for qualified expenses, like higher education tuition, mandatory fees, and room and board. The 529 account savings can also be used toward a beneficiary’s K-12 tuition, up to $10,000 per year for each beneficiary. However, in this scenario, you’ll likely have less time to allow your contributions to grow before they’re needed.Under the SECURE Act of 2019, a lifetime maximum of $10,000 from a 529 plan can also be used for a beneficiary’s qualified student loan repayment. The beneficiary’s sibling can also benefit from this rule with an additional $10,000 in lifetime distribution toward their student loan debt.

How Do 529 College Savings Plans Work?

How a 529 plan works differs based on the type you have. Only a few states offer prepaid tuition plans, and those that do generally require you to be a resident of the state. With prepaid tuition plans, you’ll pay for the units or credit in one payment or through installments. Once you’ve paid in full, the administrator invests the money for you. When your beneficiary is ready to enroll in school, the student can withdraw the funds from the account toward tuition and required fees, typically at a public in-state school.An education savings plan lets account owners make ongoing contributions into the 529 account up to the state’s contribution limit. The savings are invested by the 529 administrator through various investment strategies. The most common investment option being mutual funds, according to the North American Securities Administrators Association. When the beneficiary is ready to pay for their education, they must submit a distribution request.

Can You Withdrawal From Your 529 at Any Time?

You can withdraw from your 529 saving plan at any time. However, make sure the distributions are used toward allowed expenses, and that you plan ahead of your payment deadlines.For example, let’s say you have a New York 529 Direct Plan and need to pay the tuition. You’ll need to send a distribution request to your plan’s administrator. Then, they’ll need time to process it and send a check to the school before the payment due date. When planning a withdrawal, avoid procrastinating. Send your distribution request as soon as possible. 

What Expenses Can a 529 Plan Be Used For?

Distributions from a prepaid tuition plan can only be used toward tuition credit or units at a participating college or university. With an education savings plan, however, there are a few ways a beneficiary can use their 529 plan.

Qualified Higher Education Expenses

The definition of a qualified higher education expense includes tuition and fees; necessary books, supplies and equipment; computer, related equipment, and required software; internet access; and for students enrolled at least half-time, room and board.

K-12 Tuition

The 2017 Tax Cuts and Jobs Act allowed distributions from education savings plans to be used toward a beneficiary’s primary and secondary school tuition costs. The rule permits distributions of up to $10,000 per year, per beneficiary. Also, there’s no restriction when it comes to which schools qualify — the beneficiary’s K-12 school can be private, public, or religiously affiliated and can still be eligible for 529 distributions.

Student Loan Debt

The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act was a relatively recent change to the 529 rules. It states that beneficiaries are allowed to use up to $10,000 of a 529 plan toward their own qualified student loans. This is a one-time allowance for the life of the plan and not an annual limit. Even the beneficiary’s siblings benefit from this legislation change, if the sibling has existing qualified student loans. Each sibling is allowed a $10,000 lifetime distribution to repay their student debt, too.

What Happens If Your Child Doesn't Go to College?

If the beneficiary of a 529 plan chooses not to enroll in college, there are a few ways to use the funds without incurring a penalty. Many education savings plans let you change your named beneficiary. You can dedicate the plan to the original beneficiary’s younger sibling to help pay for their K-12 tuition. Additionally, in naming the sibling the new beneficiary, you can choose to continue saving toward their future college education.If you’re planning on re-entering higher education, whether it’s to finish your degree or to pursue an advanced degree or certification, you can also name yourself the new beneficiary. Keep in mind that you’ll need to still use the money for qualified higher education expenses; you can also use up to $10,000 of the 529 plan toward your own student loan debt.Recommended: Using a 529 Plan vs a Savings Account for College

Pros and Cons of a 529 Plan


  • Less need for student loans. The more you can save through a 529 college savings plan, the fewer student loans you’ll need to borrow. Graduating with less or no education debt means fewer years spent repaying private or federal student loans.
  • Tax advantages. Earnings in the account can accrue tax-free, and distributions that cover the cost for qualified higher education expenses and K-12 tuition aren’t taxed. Additionally, beneficiaries don’t typically need to report 529 plan distributions as income on their income tax returns.
  • Flexible covered expenses for certain 529 plans. Allowable uses for 529 plans are for primary and secondary tuition, and includes student loan repayment for the beneficiary and their siblings up to a lifetime distribution limit. 
  • Changing beneficiaries is straightforward. Account owners can change the beneficiary easily, if needed. Such as if a child no longer plans on going to college, or has received a full scholarship and no longer needs the funds.


  • Funds can only be used for education. 529 plans can only be applied toward qualified higher education expenses, or tuition for primary or secondary school. Recent legislation also allowed up to $10,000 in lifetime disbursements for the beneficiary, and an additional benefit for each sibling, but otherwise, use cases are limited. 
  • Certain non-qualified withdrawals incur tax penalties. If funds are drawn for an expense that doesn’t meet the plan’s rules, it’s subject to state and federal income taxes and you’ll incur a 10% federal penalty on your earnings. 
  • Investment options might be limited. You’re limited to the investment options that are offered through the plan, and you’re restricted in the number of times per year you can change your investment option for education savings plans.
Fees might apply. With either 529 account type, you might face enrollment fees and various management fees.
Less dependency on student loansWithdrawal restrictions
Tax benefitsPossible tax penalties
Education savings plans can be used toward K-12 tuitionPrepaid tuition plan limitations
Easy to change beneficiaryFees might apply

The Takeaway

If paying off student loans after leaving school is an unappealing prospect, saving money in a 529 account is a proactive option. When deciding on a 529 plan, compare the federal and state tax implications, fees, investment options, resident benefits, and restrictions of each plan.

3 Student Loan Tips

  1. Once the pandemic-related pause on federal student loan payments ends, going back to making payments may be hard on budgets. One solution is to refinance to a lower interest rate, longer loan term, or both, depending on your situation. (The tradeoff is that you’ll be forfeiting federal benefits such as repayment programs.) Find and compare your student loan refinance options.
  2. Paying extra each month on your student loan can reduce the interest you pay and so lower your total loan cost over time. (The law prohibits prepayment penalties on federal or private student loans.)
  3. If you teach full-time for five complete and consecutive academic years in a low-income school, you may be eligible for federal student loan forgiveness.

Frequently Asked Questions

What is a 529 plan and how does it work?
What happens to 529 if a child does not go to college?
Are 529 plans worth it?
Photo credit: iStock/NoSystem images

About the Author

Jennifer Calonia

Jennifer Calonia

Jennifer Calonia is a Los Angeles-based finance writer who has covered the gamut, including student loans, credit card rewards, consumer loans, and debt. Her work has been featured in outlets like Bankrate, NerdWallet, Business Insider, Yahoo Finance, and U.S. News.
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