Special college-savings programs known as 529 plans, which have been around for more than two decades, have become cheaper and more flexible over the years. But families should still do some comparison shopping before choosing a plan, advisers say.

“It’s still the best option to save substantial amounts of money,” said Scott Beaudin, principal of Pathway Financial Advisors in South Burlington, Vermont.

State-sponsored 529 plans offer accounts that can be used to save and invest for college. More recently, plans allow families to save on other types of educational expenses, including private K-12 tuition and even apprenticeships.

Money deposited in a 529 account grows tax-free and is withdrawn tax-free, when spent on eligible expenses. (There is no federal tax deduction for 529 contributions, but many states offer tax breaks.)

Some states began offering college-savings programs as early as the late 1980s, but federal legislation in 1996 and 2001 helped expand 529 savings accounts nationally. Now, 49 states (Wyoming is the exception) and the District of Columbia offer 529 plans — named for a section of the federal tax code.

Despite the coronavirus pandemic, 529 funds swelled in 2020, as families spent less on travel and leisure activities and saved more. “We’ve seen substantial growth across the board, somewhat surprisingly,” said Mary Morris, CEO of Virginia529, Virginia’s college-savings program.


Account balances also benefited from the stock market, which boomed last year after an initial, pandemic-induced downturn. Savings in 529 accounts totaled about $425 billion at year end, up 14% from 2019, according to the College Savings Plans Network, a group that promotes the accounts. There are now almost 15 million accounts with an average balance of about $29,000.

Still, states see room for more growth, and many offer promotions, such as matching contributions, or sweepstakes around May 29, dubbed “National 529 Day,” to encourage saving.

This year, Virginia is offering the chance for three new account holders to win $10,000 prizes, which will be deposited to their accounts. Savers nationwide are eligible if they open a new Invest529 account and deposit at least $25 by June 1.

Other states are offering more modest incentives. In Iowa, the state’s 529 plan is giving away up to 99 prizes of $529, and a grand prize of $1,529, for deposit in either new or existing 529 accounts.

The College Savings Plans Network offers a list of promotions on its website.

The promotions may help give people a nudge. The younger your child is when the account is opened, the more time your money has to grow. “Just get out of your chair and sign up,” said Mari Adam, a certified financial planner in Boca Raton, Florida.


You don’t have to use your own state’s plan. Most states allow nonresidents to open a 529 plan. But there may be tax deductions or credits for opening an account through your home state’s plan, so check that out first. A few states give tax breaks for contributions to any 529, even one in another state.

If your state doesn’t offer a tax break, consider another state’s offerings and focus on fees. Enrollment fees and fund-management fees can eat away at your investment returns, so lower is better.

Usually, plans that you enroll in yourself — “direct sold” plans — offer much lower fees than those sold through financial advisers who charge commissions and have grown more quickly than adviser-sold plans.

Most 529 plans offer investment options that automatically shift account holdings to less volatile bonds from riskier stocks, as the account’s beneficiary grows up and gets ready to enroll in college.

It’s a good idea, however, to consider a plan’s “glide path,” or the method it uses to adjust the mix of investments over time. Plans that shift funds abruptly can be risky, if the change occurs during a market downturn. That’s why more plans are offering investment portfolios with more gradual, “progressive” changes, similar to target date retirement accounts, according to research firm Morningstar.

The number of portfolios using a progressive strategy have nearly doubled since the end of 2018, according to the firm’s latest report on the 529 industry, published this week.


Once you sign up for a plan, pay attention to any changes in the way the accounts are handled. Last year, fund manager Vanguard, which offers 529 plans through Nevada’s college-savings program, mistakenly increased the proportion of stock in some portfolios to higher — and therefore riskier — levels. The error wasn’t corrected for several months. Fortunately, the mishap coincided with a stock market upswing, so lucky account holders received a windfall, according to Morningstar.

In a statement, Kirsten Van Ry, chief of staff of the Nevada state Treasurer’s office, said the office was made aware of Vanguard’s error on March 19 and that “within weeks,” all account owners who had been “negatively impacted” were identified, notified and “made whole.”

Investors who benefited from the error will not have to repay any money. “We are committed to working with Vanguard to ensure an error like this does not happen again,” the statement said.

Vanguard, in a statement Thursday, called the mistake “a portfolio-implementation error,” and said it had been corrected. “The glide-path design and methodology has been and remains sound,” the company said.

The outcome could have been different, however, if the error had occurred during a downturn, said Madeline Hume, a Morningstar analyst. She advised being familiar with your plan’s performance, so you can gauge if returns seem out of the ordinary, and paying attention when your plan notifies you of changes. “It’s important to keep aware of what communications are coming out,” she said.

The firm rates 529 plans on factors such as fees, investment options and plan oversight, and most are rated gold, silver or bronze, indicating they offer a net benefit to investors. However, eight plans received “negative” ratings, mostly because of excessive fees.


Here are some questions and answers about 529 saving plans:

Q: What college expenses can 529 funds be used for?

A: Savings in a 529 can be used to pay college costs including tuition, room and board, mandatory fees, books, supplies and required equipment.

Q: Can I use 529 funds to pay student loans?

A: Yes. Under a law passed in 2019, up to $10,000 from a 529 account can be used to repay a beneficiary’s student loans. Another $10,000 each can be used to repay student loans borrowed by the beneficiary’s siblings.

Q: Can grandparents save in a 529 account for a grandchild?

A: Yes — and an upcoming change to an important financial-aid form, the Free Application for Federal Student Aid, or FAFSA, should help to make that more attractive.

Currently, contributions from grandparent-owned 529 plans are reported on the FAFSA as untaxed cash support to the student, which can reduce eligibility for financial aid, said financial-aid expert Mark Kantrowitz. An updated FAFSA, however, will eliminate the question about cash support, he said, so distributions from grandparent-owned 529s will no longer be included on the form. The change is expected to take place with the FAFSA available in late 2022, for the 2023-24 academic year.

The change, however, does not affect a different student-aid form, the CSS Profile, which is required by many higher-cost private colleges, Kantrowitz said.