Doing the Math: How a 529 Plan Can Help Pay for College

Tax-free savings can go a long way toward funding tuition, if you start early

Two hands around a piggy bank with a graduation cap floating over the piggy bank. Photo Illustration: Getty Images

A 529 plan is one of the best ways to save for college. The money grows tax-free, and many states give you a tax deduction to boot.

But many families don’t take advantage of this opportunity. In fact, only 37 percent of families used a 529 account to help pay for college last year, according to a 2021 survey by Sallie Mae (PDF).

“Many families aren’t aware of 529 plans, and others don’t like the idea of saving in an account limited to educational expenses,” says Mark Kantrowitz, a financial aid expert and former publisher of the Saving For College website.

Consumer Reports did some number-crunching—with the help of Vanguard—to show what you’re missing if you’re not taking full advantage of a 529 plan. It can add up to tens of thousands of dollars.

Closing the Savings Gap

For instance, if you opened a 529 account for a newborn this year and contributed $250 a month, Vanguard’s college savings calculator estimates you’d have more than $113,000 when your child heads off to college in 18 years. That’s more than double your $54,000 investment.

It’s also enough to cover almost half of what Vanguard predicts will be the $235,000 cost of a four-year, in-state public college in 2040, including tuition, room, and board (the current cost is about $91,000).

More on Saving for College

If you put in $450 a month, you’d have more than $200,000 in 18 years on a $97,200 investment, which is enough to cover almost 40 percent of the expected $536,000 cost—hard as that is to believe–of a four-year private college (current cost: $207,000).

Of course, many young families don’t have $250 or $450 a month to spare, especially with the arrival of a new baby. The average age of a 529 beneficiary when an account is opened is 7 years old, according to Patricia Oey, senior analyst for multi-asset and alternative strategies at Morningstar.

Whichever amount you put in, you’re getting a big discount off the price of a college education, and who can turn down a sale like that?

You can even start with a token amount, say, $25 or $50 a month. As your income grows—and some expenses like diapers and child care fall away—you can funnel additional money into your 529.

Even if you get a late start, you can make progress. Say your child is 6 years old. If you contribute $250 a month until they go to college in 12 years, you’ll have nearly $67,000 on your $36,000 investment.

These are only average estimates, of course, and your actual returns will vary depending on the type of mutual funds you invest in and how stocks and bonds perform during these time periods. (To run the numbers for yourself, try Vanguard’s college savings calculator.)

Also keep in mind that it’s hard to know exactly how much college will cost in the years ahead. But a good rule of thumb is to save at least one-third of the money you expect to need, with the remainder coming from income and financial aid, Kantrowitz says. 

There’s still another reason to save. If you wait to pay for college and end up taking out student loans, the cost of college can be considerably higher than the sticker price. 

Say you’re a typical public college graduate with a loan balance of almost $27,000, at an average interest rate of 4.9 percent. (Interest rates on loans are likely to rise for the 2022-23 academic year.) You could end up paying a total of $34,207, including interest, if you make fixed payments over 10 years. That’s an additional $7,207 you could’ve avoided paying. 

“Each dollar you put away for college can save you far more in interest payments,” Kantrowitz says.

Other 529 Benefits

In addition to long-term compounding, 529 savings plans offer three key advantages. 

Tax Breaks
As noted above, money in a 529 plan can be withdrawn free of federal and state taxes as long as you spend it on qualified higher-education expenses, such as fees, books, and computers. 

You may also get a state tax break for your contributions, which are offered by about two-thirds of states.

Favorable Financial Aid Treatment
Assets in a 529 account do not weigh heavily on a student’s eligibility for federal financial aid, including student loans. Any account that is owned by grandparents or someone else won’t be counted at all for aid purposes. And assuming new federal aid rules are not further delayed, distributions from grandparent-owned accounts in 2022 won’t be counted as income for the 2024-2025 academic year.

Flexibility for the Future
In some states, 529 money can also be used to pay K-12 tuition; up to $10,000 can be spent free of taxes. Check with your state plan to see whether this is an option and what the rules allow. The money can also be used for graduate school.

If your child ends up not needing the money for college, or chooses not to go, you can change the beneficiary of the plan to another family member or even yourself. You can also opt to withdraw the money, which will be taxed at the beneficiary’s rate. You’ll pay a 10 percent penalty on the earnings growth.

Finding a 529 Plan

You don’t have to save in your own state’s plan; most 529s are open nationwide. But it’s worth checking out your home state offerings first because of the possible tax breaks.

Pay attention to fees because low costs will allow you to keep more of the returns. The average fee for an age-based or target-enrollment portfolio is 0.42 percent, but fees for plans that favor low-cost index funds tend to cost less than 0.20 percent, according to Oey. For example, Utah’s my529 plan charges just 0.14 to 0.17 percent for age-based conservative funds.

To compare 529 plans, you can go to Morningstar’s 529 website or Saving For College.


Photo of CR Money editor, Penny Wang.

Penelope Wang

I cover everything from retirement planning to taxes to college saving. My goal is to help people improve their finances, so they have less stress and more freedom. What I enjoy: walks through the city, time with family, and reading mysteries, though I rarely guess who did it. Follow me on Twitter (@PennyWriter).