| ||||||||||||
Most families who are socking money away for their children’s college tuition don’t take advantage of tax-friendly savings tools, like 529 college savings plans, that could potentially enhance their savings.
The latest report from Education Data Initiative reveals that just 35 percent of families use a tax-deferred college savings program, such as a 529 plan, to save for future education costs. While more than 16 million American families currently save for college using 529s, it found, more than half (54 percent) of parents are still unaware that 529 program exist.1
Many families are banking on a college-sponsored scholarship as their top strategy for paying for college, while others plan to use federal student aid programs, such as Pell Grants. (Pell Grants are federal subsidies that are typically only awarded to undergraduate students who demonstrate financial need. Unlike a loan, grants and scholarships do not need to be repaid.)
But they are far more likely to pay out-of-pocket for tuition using income and traditional savings accounts, which offer no tax benefit and miniscule interest rates. (Calculator: How much do I need to save for college?)
Sallie Mae, the nation’s leading provider of education funding, reports that parents saving for college covered nearly half (49 percent) of college costs in 2025 using a combination of income, savings, and borrowing. 2 And 74 percent of all families reported using parent income and savings to help pay for tuition.
While any amount of money that parents set aside can help college-bound kids minimize the debt they will incur upon graduation, savings accounts with tax-friendly benefits, such as 529 plans and Coverdell Education Savings Accounts, can potentially offer a more efficient way to save, said Ellen Roberts, a Sallie Mae spokesperson.
“Sallie Mae often highlights the use of 529 plans,” she said. “In fact, they’re an important part of our 1-2-3 approach to saving for college: first, open a savings account; second, set a goal and make deposits regularly; and third, explore tax-advantaged options such as 529 college savings plans.” (Learn more: College savings: Learn how to navigate saving, paying for college and managing student loan debt.)
The tax-friendly 529 college savings plan
Contributions to a 529 account are made on an after-tax basis, and thus yield no immediate tax deduction, but any earnings accumulate tax-deferred, with tax free withdrawals if used for qualified education expenses such as tuition, fees, books, and room and board.
Individual states may also offer a full or partial tax deduction for residents who invest in the 529 college savings plan operated by their state. (Your choice of 529 plan has no impact on where your child can attend college, which is a common misconception. You can open a 529 account in your home state of, say, Virginia, and your child can use it to pay for tuition at a qualified school in Vermont.)
New regulations are offering families more flexibility in how 529 funds may be used.
In 2026, account owners can use up to $20,000 per beneficiary in 529 plan savings for qualified elementary and secondary education expenses. The One Big, Beautiful Bill Act (OBBBA) also expanded those benefits by allowing funds to be used for broader educational expenses, including:
- K-12 tuition and supplies.
- Tutoring.
- Test preparation.
- Homeschooling.
- Educational therapies for students with a disability.
- Postsecondary career training like apprenticeships and licensing.
Unused 529 funds may be eligible to be transferred to a Roth IRA for the beneficiary.
The most recent data from the College Savings Plan Network, a resource for state-operated college savings programs, reveal 529 plans nationally have $609 billion in assets under management, with an average account balance of $34,084.3
Connect with a MassMutual financial professional
Two types of 529 plans
529 programs come in two flavors: Prepaid tuition plans and college savings plans. The prepaid tuition plans, which are less popular, allow parents and others to purchase "units" of tuition, or credits, for future use by a designated beneficiary based on today’s cost of tuition – effectively enabling them to reflect today’s tuition costs for future use. (Learn more: Prepaid versus savings 529s)
By contrast, contributions to a college savings plan are invested in stocks, mutual funds, and bonds. Many, but not all, 529 college savings plans automatically adjust their asset mix to become more conservative as the beneficiary approaches college age and the emphasis shifts to asset preservation rather than growth. Because their return is tied to market performance, 529 college savings plans are subject to risk. There are no guarantees your investment will grow.
Also, any earnings not used for qualified education costs are generally subject to a 10 percent withdrawal penalty, although some exceptions do apply. Account owners, for example, would typically not be penalized if the beneficiary dies or becomes disabled, receives a scholarship, or decides to attend a U.S. military academy. You would still, however, owe income tax on the earnings.
“We absolutely recommend clients consider 529s,” said Christopher Stappas, a financial professional and principal with Summit Financial Resources in Parsippany, New Jersey. “The tax benefits are good, but one of the ancillary benefits that a lot of people overlook is that they help families set up a structured, disciplined strategy for saving. That’s the way you build wealth. When you automate your savings, all of a sudden you get this statement at the end of the year and you’ve saved $20,000 and you didn’t even miss it.”
The downsides to 529 accounts may explain why some families stick with more traditional savings tools.
“Some families choose not to invest in 529s because they either aren’t sure if their child will choose to attend college, or because they don’t get an immediate tax deduction for their contribution, as they would with a tax- deductible IRA contribution, so they just choose not to,” said Kathryn Hauer, a financial professional with Wilson David Investment Advisors in Aiken, South Carolina, and author of “Financial Advice for Blue Collar America.”
Also, she said, they may not be positioned financially to benefit from the effects of compounding: “You get the biggest potential benefit from a 529 by starting young and investing when the child is little, but it’s hard to look at a two-year-old and think about that child going to college, especially when there are so many other immediate costs to contend with.”
Jim DiUlio, vice-chair of the College Savings Plans Network and director of the 529 program operated by Wisconsin, also attributes the minimal participation in 529s nationally to lack of knowledge about the tax benefits.
“Prepaid tuition plans have only been around about 30 years and 529 college savings plans for even less so a lot of the general public, and even some financial professionals, are still really not aware of the program benefits,” DiUlio said. “I think it’ll be a no-brainer for the next generation, the young adults who actually went to school using 529s, when they start their own families.”
To counter fears about 529 penalties, DiUlio said account owners do have options if their child decides not to pursue higher education. For example, you can pass those savings on to any siblings, nieces, or nephews. “Almost everyone who comes for Thanksgiving dinner would be eligible,” he said. (Learn more: Alternatives for 529 college savings)
Starting in 2024, 529 account holders are also now generally able to transfer up to a lifetime limit of $35,000 to a Roth IRA for a beneficiary (i.e. the student). (Related: New in 2024: 529 transfers to a Roth IRA)
Or, the account owner can simply leave the funds in the account and use them if the original beneficiary decides to attend college down the road, or use their savings to pay for their own education should they decide to take college credits or change careers. “That’s something most people don’t think about,” he said. “People are constantly reinventing themselves and seeking different degrees.”
Alternative college funding options: Coverdells, UGMAs, UTMAs, IRAs, and life insurance
529 college savings plans, of course, are not the only game in town for families looking to finance qualified education costs.
Alternative college savings tools include:
- Coverdell ESAs, which are potentially available to those with modified adjusted gross income of less than $100,000 ($200,000 in the case of a joint return). As with a 529, contributions are not deductible, but amounts deposited in the account for beneficiaries grow tax-deferred, with tax free distributions for qualified education expenses. The limit to how much you can save, however, is $2,000 per beneficiary per year, no matter how many accounts have been established. By comparison, contribution limits for 529 plans are set by the state, but can be as high as $589,650(Wisconsin).4 (Taxpayers may contribute up to $19,000 per year [$38,000 per couple] to a 529 in 2026 without triggering the gift tax.) They can also potentially opt for a special election that allows them to treat a single contribution of $95,000 [$190,000 for married couples] as if it were made over a 5-year period, and avoid immediate gift tax consequences.
- Uniform Gift to Minors Act (UGMA) and Uniformed Transfer to Minors (UTMA) accounts, also known as custodial accounts, are yet another savings tool. Donors (parents, grandparents and others) may open an UGMA or UTMA account in a beneficiary’s name. Any income it generates must be reported on the child’s tax return and is taxed at the child’s rate. Note, too, that the donor cannot impose conditions on the account. When the beneficiary is eligible to receive the funds, he or she may use the money for any purpose he or she likes — which may not necessarily be a college degree.
- Individual retirement accounts, IRAs, may also provide a port in the storm for families struggling to save for college tuition. The IRS allows savers to tap their IRA penalty free to pay for tuition, fees, books, supplies, and equipment required for college before age 59-1/2. Normally, IRA owners who take early distributions from their account are subject to a 10 percent additional tax on the amount withdrawn. You may still owe income tax on at least part of the amount distributed. Financial professionals caution, however, that parents should never tap their own retirement savings unless they have already met their nest-egg goal. Students can always get a scholarship or take on loans, but no such help exists for meeting living expenses during retirement.
- Permanent life insurance, such as whole life insurance, which accumulates cash value, may potentially be used on a tax advantaged basis to help pay for tuition, although its primary purpose is providing a death benefit. Unlike money that accumulates in a 529 plan, which is considered a parental asset for purposes of determining federal financial aid eligibility, the cash value in a life insurance plan is generally sheltered from the financial-aid-need analysis. Access to cash value through borrowing or partial surrenders, however, will reduce the policy’s cash value and increase the chance the policy will lapse. If this happens, it may result in a tax liability.
For some college savers, a combination of several savings tools might make sense.
Danijel Velicki, for example, a financial professional with Opus Group of Virginia in Virginia Beach, Virginia, said he intends to have his children take on student loans, which he will help repay (only if they graduate) with the savings he is accumulating in taxable brokerage accounts and his cash value life insurance policy. He is also saving money in a 529 to help cover the costs of books, fees, and other qualified expenses along the way.
“College saving doesn’t just have to be 529s,” he said. “We all know the markets go down, so this way I’m diversified. If the stock market is down when my kids go to college, I can use my cash value and leave my invested assets alone until the market recovers.”
Families should work closely with a financial professional to determine a savings strategy that works best for them.
Since 1851, MassMutual has been focused on helping people secure their financial future and protect the ones they love. That mission is why we have over 7,500 financial professionals to assist you on your journey through insurance, investing, retirement planning, estate management, and more. You can find a MassMutual professional with this tool or you can let us know you’d like to talk to one and we’ll have one of our financial professionals can contact you.
Frequently Asked Questions:
Q: What is a 529 plan and how does it work?
A: A 529 plan is a tax-advantaged savings account specifically designed to help families save for education expenses. Named after Section 529 of the Internal Revenue Code, these plans allow your contributions to grow tax-free, and withdrawals are also tax-free when used for qualified education expenses like tuition, fees, books, room and board, and even up to $20,000 per year for K-12 tuition in 2026.
There are two types: savings plans (which work like investment accounts where you choose from various portfolio options) and prepaid tuition plans (which allow you to lock in current tuition rates at participating colleges). Most families use savings plans for their flexibility — the funds can be used at most accredited college, university, or vocational school nationwide, and even some international institutions.
Q: What are the tax benefits of a 529 plan?
A: 529 plans offer a number of tax advantages. On the federal level, earnings on your contributions can grow tax-deferred while in the account and withdrawals become tax-free when used for qualified education expenses. Many states also offer tax deductions or credits for contributions (some offer deductions up to $10,000 or more per year), matching grants or other incentives. A few states also allow tax benefits if you invest in another state’s 529 plan. Your contributions also qualify for the annual gift tax exclusion ($19,000 per beneficiary in 2026, or $38,000 for married couples.)
Q: What happens if my child doesn't go to college or gets a scholarship?
A: If you child does not use their 529 funds, your money isn’t trapped. You can transfer the account to another family member, or use it for the original beneficiary’s graduate school, trade school or apprenticeship. You can also roll over up to $35,000 (lifetime limit) from a 529 plan to a Roth IRA in the beneficiary's name as long as the account has been open for at least 15 years. Lastly, you can withdraw funds for any purpose at any time, but earnings will be subject to ordinary income tax plus a 10 percent federal penalty if not used for qualified education expenses. Contributions are always returned tax-free since you already paid tax on them.
Discover more from MassMutual…
529 college savings strategies
A primer on college financial aid
What happens to your student loans when you die?
This article was originally published in March, 2017. It has been updated.
______________________________
1 Education Data Initiative, “College Savings Statistics,” Jan. 28, 2025.
2 Sallie Mae, “How America Pays for College," 2025.
3 College Savings Plan Network, “529 Plan Data,” Dec. 31, 2025.
4 Saving for College, “529 Contribution Limits 2025: Maximums by State, Gift Tax Exclusion, and More,” Jan. 1, 2026.
