Should You Take Advantage of 529 Plan Changes?

Parents now have more options to pay for their child’s K-12 education, but it may not be advantageous for everyone.

A 529 savings plan is a tax-deferred savings account that can be used for any college expenses, including tuition, books, and housing. Previously, parents could only use 529 plans for K-12 school tuition, but the ‘One Big, Beautiful Bill’ that President Donald Trump signed into law on July 4 expands the usage of 529 plans for other expenses before college.

However, college prices continue to grow, and many parents cannot afford them. Therefore, parents should think carefully before spending much of their 529 savings on K-12 expenses, said Jack Wang, college financial aid advisor with Innovative Advisory Group.

Investopedia talked to Wang about the expansion of 529 accounts and how it changes the way parents save for their child’s education. The interview has been edited for brevity and clarity.

INVESTOPEDIA: What is the advantage of putting money into a 529 savings plan instead of a high-yield savings account or opening a Certificate of Deposit?

JACK WANG: The main thing is the tax benefits. Money that’s in a 529 and used for qualified expenses like college tuition can grow tax-deferred, and when used for these qualified expenses, the money can be withdrawn tax-free. Whereas with savings accounts and CDs, you’re taxed as you go on the earnings.

The other thing is there are a lot of states that’ll offer tax deductions for saving in that states’ 529. So, not only do you save money on the growth and withdrawal future at the federal level, but you can save a little bit on your state tax now as well. 

I think 529s are fantastic. They are a great way to save for college, but they’re not the only way to save and pay for college. So even with the expanded allowed usage for 529 accounts, families should really look at all their options because sometimes money has to be available for things [like retirement, mortgages, or emergency funds], depending on whatever comes up. In that regard, 529s are not as flexible as other options.

INVESTOPEDIA: How do you think these changes will impact how parents save for their child’s education?

WANG: For these changes in particular, it offers more incentive for parents to save and to save earlier. Because now, if the parents were thinking about either private school or these other types of expenses at a public school—now, they can use that money they saved.

The ‘Big, Beautiful Bill’ overall is going to force families to look at the financial side of education, especially college, a lot earlier, and look a lot closer at the loan limits. [The] ‘Big, Beautiful Bill’ makes, I think, the biggest changes in student loans and financial aid in like 20 years.

INVESTOPEDIA: What are some suggestions for individuals saving up for their children to take advantage of some of these 529 plan changes?

WANG: It’s going to be a really interesting choice. Because, parents who save money in a 529, yes, you can use the money for these types of expenses now—but that doesn’t necessarily mean the parents should.

Chances are, for example, …SAT prep fees, or test prep fees, or tutoring, or buying extra books in the classroom, that money probably is not that much compared to the total cost of college. So even though parents will have the ability to pay for this stuff, they may not want to because of the other changes to student loan limits. They may be better off keeping the money in the 529 and just using it for college.

Not only that, but because of the even bigger changes at the graduate professional school level regarding loans, they may not even want to use them for undergrad. They may need to hang onto this for grad school.

It’s going to really force some interesting decisions. It’s going to force families to really look at paying for college in a totally different light than what they’ve been used to doing for the last 20 years.

INVESTOPEDIA: When would it be advantageous for families to incorporate some of the changes and pay for other K-12 expenses?

WANG: One thing, as an example, if a student is able to take advantage of dual enrollment classes, chances are, in almost every case, it’s going to be a lot cheaper to take that class as dual enrollment than it would be to take that same class when that kid’s already in college.

…It might be worth using the money to pay for dual enrollment classes so that the credits transfer to a four-year school. This way, you shave time off there, and you effectively save a lot more money.