Paying for College: What to Know
Every parent hopes to send their child to college, but the cost can feel overwhelming. Tuition in the U.S. continues to rise, according to the College Board. College can cost tens of thousands of dollars each year.1
For the 2025–26 school year, average tuition and fees for full-time students at four-year colleges range from:
| School Year | Average Tuition & Fees |
|---|---|
| Public Four-Year In-State | $11,950 |
| Private Nonprofit Four-Year | $45,000 |
Fortunately, you have options as a parent. One option is a 529 college savings plan, which allows you to set aside money for qualified education expenses. Learn the basics of 529 plans, how they work, and whether they may fit your family’s needs.
Understanding a 529 College Savings Plan
A 529 plan is a tax-advantaged investment account designed to help families save for education costs. These plans are sponsored by states, state agencies, or educational institutions and can be opened on behalf of a beneficiary (such as your child).
How It Works
You contribute money to the account, where the funds are invested and have the potential to grow over time, though they may also lose value. When it comes time to pay for education, you can withdraw the funds to cover qualified educational expenses at accredited institutions. Throughout the process, earnings grow tax-deferred, and withdrawals used for qualified expenses are generally free from federal and state income taxes.
Who Can Open a 529 Plan?
- Parents
- Grandparents
- Aunts
- Uncles
- Cousins
- Non-relatives
These accounts are flexible, allowing you to transfer them to another qualified family member of the beneficiary if needed. Additionally, there’s no limit to the number of 529 plans a person can open.
Contribution Rules
Maximum contributions vary by plan. States set their own limits (often above $300,000). While the IRS doesn’t impose a strict cap, federal gift tax rules may apply if contributions exceed annual gifting limits.2 For specifics, check your plan’s program description.3
Tax Benefits & Penalties
529 plans offer several tax advantages:
- Contributions may or may not be tax-deductible depending on your state.
- Money grows tax-deferred.
- Withdrawals for qualified expenses (tuition, fees, books, some room and board) are generally tax-free.
If funds are used for non-qualified expenses, you may face:
- A 10% federal tax penalty on earnings.4
- Ordinary income tax on any gains.
Prepaid Tuition vs. College Savings
There are two main types of 529 plans: Prepaid Tuition Plans and College Savings Plans. Both can help pay for future education, but they work differently.
Prepaid Tuition Plans
With prepaid tuition plans, you purchase credits at participating colleges and universities, locking in today’s tuition rates for future use. This approach helps protect against rising tuition costs because the value of the credits stays tied to tuition over time. For example, if you buy credits equal to two-thirds of the current in-state tuition, those credits should still cover two-thirds of tuition when they are used years later.
Limitations
- Usually cannot be used for room and board.
- Often limited to public or in-state schools, not private or out-of-state options.
- The student (beneficiary) may need to be a state resident.
- If the student doesn’t attend a participating school, the payout may be less than contributions.
College Savings Plans
These accounts work by investing money in portfolios, often made up of mutual funds or ETFs. Over time, the account can grow in a tax-advantaged way, and the funds can later be withdrawn to help cover qualified education expenses.
Flexibility
- Usable at any accredited college or university in the U.S. (and some abroad).
- Covers a wider range of costs, including tuition, fees, books, and often room and board.
Investments in these accounts are subject to market fluctuations, meaning balances can rise or fall over time. Additionally, if funds are withdrawn for non-qualified expenses, taxes and penalties may apply.
Quick Comparison
| Feature | Prepaid Tuition Plans | College Savings Plans |
|---|---|---|
| Covers Tuition | Yes | Yes |
| Covers Room & Board | No | Yes (if qualified) |
| School Options | Mostly in-state, public | Any accredited college/university |
| Investment Growth | No (tuition locked at current rates) | Yes, but tied to market performance |
| Risk | Lower (fixed tuition credits) | Higher (market risk) |
| Residency Requirement | Often required | Usually not required |
How Can the Money Be Spent?
A 529 college savings plan can only be used for qualified education expenses. These are costs directly tied to a student’s education.
| Qualified Expenses | Non-Qualified Expenses |
|---|---|
|
Tuition and fees |
Food and meal plans beyond approved room and board |
| Books, supplies, and required equipment | Cellphone payments or service plans |
| Room and board (for students enrolled at least half-time) | Clothing or personal items |
| Computers, software, and internet access (if required for schoolwork) | Entertainment (concerts, movies, streaming services) |
| Certain K–12 tuition expenses (up to $10,000 per year, depending on the plan) | Transportation or travel costs |
Using funds for non-qualified expenses could result in taxes and penalties, so it’s important to plan carefully.
Conclusion
Deciding whether a 529 plan is the right choice comes down to your family’s needs. Think about your financial situation today, how much time you have to save before your child starts school, and whether you want the option to use funds for K-12 or higher education expenses. By understanding what a 529 plan covers and what it does not, you can better decide if this type of savings account fits your long-term education goals.
Sources
- Trends in College Pricing: Highlights. https://research.collegeboard.org/trends/college-pricing/highlights.
- Tax Benefits for Education. https://www.irs.gov/pub/irs-pdf/p970.pdf.
- 529 State Comparison. https://www.collegesavings.org/find-my-states-529-plan.
- H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. https://www.congress.gov/bill/115th-congress/house-bill/1/text.
