Charting the New Course for 529 Plans: Bigger Scope, Smarter Savings
For many families, the idea of paying for a child’s education can feel overwhelming. Tuition has outpaced inflation for decades (See Figure 1), and student loan balances continue to weigh on graduates well into adulthood. The Consumer Price Index (CPI), the government’s main tool for measuring inflation, has increased at an average of 2.67% per year since 2010, while education inflation has increased 3.63% annually during the same period. The roughly 1% difference between these figures may seem minute; however, compounding results in a significant difference between your purchasing power and the cost of tuition.
To illustrate, the average annual cost of tuition at a 4-year institution was about $18,000 in 2025. If you were to have a child this year, that $18,000 would be equivalent to $28,923 by the time the child turns 18 based on the general inflation rate above. On the other hand, you could expect the average annual tuition cost to reach $34,198 at this point, about a $5,300 difference between your purchasing power and just one year’s tuition. This example highlights a key reality: setting money aside in a low-yield savings account will not be enough to save for your child’s future.
Without growth that at least keeps pace with education inflation, your purchasing power will fall short of the rising cost of tuition. Nevertheless, a powerful solution exists, as one of the most effective ways families can get ahead of these costs is through a 529 plan, a tax-advantaged savings vehicle designed specifically for education.
Why Families Turn to 529s
According to the Education Data Initiative, more than $500 billion was invested in 529 accounts nationwide as of 2023, making them the leading tool for education-focused saving. These accounts allow earnings to grow tax-free, without income restrictions on who can contribute, and if withdrawals are used for qualified education expenses, such as tuition, books, supplies, and room and board. One should note, however, that contributions are treated similarly to Roth IRA contributions, meaning they are not tax-deductible.
Every state sponsors its own plan with unique features and incentives, but families are not limited to their home state’s program. This flexibility allows investors to choose the plan that best fits their needs, whether that means lower fees, better investment options, or more generous tax benefits. Furthermore, due to the SECURE 2.0 Act of 2022, up to $35,000 of unused 529 funds can be rolled into a Roth IRA as long as the 529 account has been established for 15 years, the money transferred has been vested for at least 5 years, and the contributions do not cause the beneficiary to exceed annual IRA contribution limits. Ultimately, the changes from the SECURE 2.0 Act help lessen concerns about overfunding an account.
Essentially, 529s offer families:
Flexibility: Funds are eligible for use at K–12 schools, colleges, vocational programs, and apprenticeship training.
Control: Account holders, often parents or grandparents, maintain ownership and control regardless of the beneficiary’s age.
Efficiency: With tax advantages, state incentives, and rollover options, 529s provide more value and efficiency than a typical brokerage account for education savings.
What The “Big Beautiful Bill” Changes
On July 4, 2025, Congress passed the One Big Beautiful Bill Act (OBBBA), which broadened the scope of how 529 funds can be used:
Higher K–12 Withdrawals: Families may now use up to $20,000 annually (double the previous limit) for private school tuition or other eligible K–12 costs, beginning in 2026.
More Qualified Expenses: Beyond the qualified expenses above, 529 withdrawals can now pay for tutoring, standardized test fees, online learning resources, dual-enrollment programs, and certain educational therapies.
Vocational and Credentialing Programs: Coverage has expanded to include continuing education and licensing programs such as welding or aviation mechanics. Readers can look up eligible schools at the following website: Is your institution 529 eligible?
Introducing Trump Accounts: A new savings option for children born between 2025 and 2028. Each child receives a $1,000 government deposit at birth, with families allowed to contribute up to $5,000 annually. Unlike 529s, these accounts function more like traditional IRAs, as withdrawals for education don’t receive the same tax-free treatment, and investments are locked in until age 18 at which point the account becomes subject to IRA regulations.
Things to Keep in Mind
While these updates give families more ways to use education savings, there are a few considerations:
- Balancing Today vs. Tomorrow: Using funds for K–12 needs may reduce what’s left for college, where costs are often greater.
- State Differences: Not all states conform immediately to federal changes, so families should check whether a state’s plan recognizes the new limits and expenses.
- Financial Aid: Parent-owned 529s count modestly in federal aid formulas, while grandparent-owned 529s are no longer required to be reported on the Free Application for Federal Student Aid (FAFSA), according to Fidelity.
- Non-Qualified Withdrawals: Earnings used for non-educational purposes are subject to state and federal taxes and a 10% penalty.
The OBBBA expands the ways families can utilize their 529 savings, offering new opportunities for private school costs, tutoring, and alternative education paths. Like many things in finance, the key is balance. Thoughtful planning that takes state 529 rules and your family’s long-term education goals into consideration can ensure that the 529 plan remains one of the most effective tools for investing in your family’s future.
Sources:
Find the Right 529 Plan for You
Education Data Initiative: Average Cost of College & Tuition
Education Data Initiative: College Savings Statistics
Education Data Initiative: College Tuition Inflation Rate
Fidelity: How to spend from a 529 college plan
InflationData.com: Education and Tuition Inflation
Investopedia: 529 Plan: What It Is, How It Works, Pros and Cons
Kiplinger: 529 Funds and a Roth IRA: How to Use One to Jumpstart the Other
Saving For College: How the Big Beautiful Bill Impacts Education Savings
Western CPE: The One, Big, Beautiful Bill Act’s Changes to 529 Plans