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How to Use a 529 Plan to Pay for College

What’s Covered:

Between 1980 and 2020, the average price of tuition, fees, and room and board for an undergraduate degree increased by 169%. The financial toll of college makes it imperative that students and their families make a plan for how to pay for their education. One popular strategy for setting aside money for school is 529 plans.


While interest in 529 plans has grown significantly in recent years—they had $411 billion in assets in 2022—the plans are more complex than the average savings account, and many people are unsure of how exactly to use a 529 plan for college.


What Is a 529 Plan?


At their most basic, 529 plans are tax-advantaged accounts designed specifically to help save for educational expenses. Earnings on your and/or your family’s investment in a 529 plan and withdrawals from it are free from federal taxes—and often free from state taxes as well—as long as they’re applied at an eligible institution and used for qualifying education-related expenses. Most public and private colleges and universities, graduate and postgraduate, and community colleges are eligible for use of a 529 plan.


Qualifying educational expenses include tuition, mandatory fees, books, computers, and room and board. It’s worth noting that just because an expense is associated with going to school, it isn’t necessarily a qualified expense—for example, the cost of traveling to/from college and fraternity/sorority fees aren’t eligible, and using money from a 529 plan on them can result in paying unforeseen taxes or penalties.


Even a modest investment in a 529 plan can add up quickly. According to Fidelity, making monthly $50 contributions to a 529 plan beginning when a child is born can add up to $16,600 by the time they’re 18. A $250 monthly contribution beginning at birth can add up to more than $80,000 by age 18.


How Can You Pay for College With a 529 Plan?


There are two primary methods for paying for college using a 529 plan. The first method is to transfer the money directly from a 529 account to the school. The second is to move the money to a bank account first, then pay the educational expenses from there.


Pay 529 Funds Directly to the College


Sending money directly from a 529 plan to a college or university is the fastest and most straightforward method of paying for college with a 529 plan. This practice eliminates the multi-step payment process, simplifies accounting, and ensures funds are applied to qualifying education-related expenses and sent to the proper office within the college or university.


Sending money directly from a 529 plan to a college keeps the transaction in the hands of those familiar with the distribution of funds—administrators of the 529 plan and the college—and eliminates the chance of a middle person (you or one of your family members) making a costly mistake.


Transfer 529 Funds to a Bank Account Before Paying the College


While paying for college directly from a 529 account is the least complex mode of paying for college with a 529 plan, you might want to choose to pay for college from a personal bank account—either transferring funds first to your personal account or reimbursing yourself for expenses you’ve already incurred.


This strategy offers some advantages. Namely, it allows you more flexibility to use 529 funds for education-related expenses that aren’t directly tied to a school, such as books, a computer, required software, or even off-campus housing.


The downside of transferring money to your personal bank account from a 529 plan before paying for educational expenses is that it can complicate record-keeping and increase the likelihood of applying the funds to an unqualified expense. If you or your family employs this method of payment, it’s imperative to keep detailed records—that is, records that match fund distribution to expenses—and to avoid unqualified expenses.


It’s also worth noting that this process is often more time-consuming than directly sending funds from a 529 plan to a college. It can take days for money to move from account to account and for a school to process a payment. This method requires that you allot enough time for the distribution of funds.


How to Make a College Education More Affordable

You can ensure that the money you and your family squirreled away in a 529 plan goes as far as possible by making your education more affordable.


1. Look at Schools that Meet 100% Need


A tried-and-true strategy for making college more affordable is to consider colleges that meet 100% of demonstrated need—that is, colleges that promise to meet the financial need of accepted applicants with financial aid packages that may include a mix of scholarships, grants, work-study, and loans. A number of colleges not only meet 100% of students’ demonstrated need, but also practice need-blind admissions, meaning they don’t consider an applicant’s financial situation when making admissions decisions.


Some colleges have no-loan financial aid policies and will meet the demonstrated financial need of students without the use of loans. In lieu of loans, they award more grant and scholarship dollars. This is an attractive option and an amazing benefit, as it enables you to graduate college unencumbered by student loan debt and without the added expense of interest.


2. Consider Schools Where Your Student Has a Strong Profile


Applying to schools where your child’s profile is especially strong provides another great opportunity to lower the cost of college. Less-selective schools will often try to entice strong students, or applicants who align with the qualities the institution is seeking, to their campus with generous merit aid offers.


Merit aid is awarded for a plethora of things, including academic achievements and qualifications, prowess in an activity (like sports or music), and a commitment to community service. Some colleges also provide scholarships for meeting certain academic marks, like earning a particular SAT or ACT score.


CollegeVine can help you better understand your child’s odds of college admission and chances of receiving merit aid. Our free chancing engine uses factors like GPA, test scores, and extracurriculars to estimate admissions odds at more than 1,600 colleges nationwide! It’s a valuable tool for building an informed college list that includes reach, target, and safety schools (keep in mind, there is a higher likelihood of receiving merit aid at safety schools).


3. Always Use a Net Price Calculator


To truly understand the expense of college, you need to know what it actually costs. Unfortunately, the sticker price of a school is not a gauge of what you’ll actually pay. In fact, according to a 2019 New York Times Magazine article, 89% of students don’t pay full price at private, nonprofit four-year colleges—a category that includes many of the nation’s most prestigious institutions.


Instead of looking at sticker prices, consider a school’s net price, which offers a more accurate estimate of what you can expect to pay for college. Calculating net price is straightforward—simply take the total cost of attendance, including tuition, fees, books, room and board, etc., and deduct any grants or scholarships you receive. Most colleges provide a net price calculator on their websites, making it even easier to discover the true cost of college.

Short Bio
A graduate of Northeastern University with a degree in English, Tim Peck currently lives in Concord, New Hampshire, where he balances a freelance writing career with the needs of his two Australian Shepherds to play outside.