How to Make the Most of Your 529 College Savings Plan

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529 college savings plan

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If you start early enough, socking away money in a 529 college savings plan is one of the smartest ways to offset the rising costs of tuition.

Parents who open a college 529 plan (named for its IRS code number) for their child’s future education can get tax-free earnings. This, in turn, can lead to borrowing less in federal and private student loans.

Contributing to a 529 plan is quite straightforward — just open an account, name your beneficiary and start depositing at will.

Tapping into it, however, isn’t quite as simple as withdrawing money from a checking account to reimburse your tuition bill. You’ll need to avoid state-specific rules and other fees that weaken your earnings, and ultimately, affect your ability to make the most out of a college 529 plan.

How well do you know your 529 college savings plan?

Don’t forget some of these specifics if you’re looking to maximize your 529 savings plan returns.

1. There is more than 1 type of 529 plan

A prepaid tuition plan allows savers to purchase units on a credit-based system to put toward tuition and fees — but not secondary expenses such as room and board — once it’s time to start living on campus.

Prepaid plans allow you to lock in today’s tuition prices at eligible colleges and universities. If a tight family budget and the amount of student loans you may borrow are priorities, this plan is likely a better fit than the standard 529 college savings plan. Always check to see which universities participate so your dollars will count.

There’s also the more well-known college savings plan where your money can be invested in a variety of ways and compound interest over time. Withdrawing funds from your 529 college savings plan is easy: Generally, you can have a check made payable to either the account holder, beneficiary or school. (However, consult with the college or university since some schools may differ.)

2. Evaluate the best 529 plans by state

Prepaid or standard, 529 plans are established and sponsored by states. But they may differ depending on where you live. More than 30 states offer tax deductions and breaks on 529 plans, though several don’t, so confirm this before you begin investing. Residents of six states — Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania — are lucky enough to be able to invest in any state’s 529 plan and get full tax benefits.

Prepaid plans stop short of covering academic costs beyond tuition and fees, so always check first to ensure your other savings will be enough to take care of out-of-pocket costs before pursuing student loans. When choosing the best 529 plan, research plans outside your home state’s offering for a fair comparison.

3. Not all 529 college savings plan distributions are created equal

The money you invest in a 529 plan will grow without being federally taxed. But not every 529 withdrawal is eligible for a tax break. For instance, tax-deducted 529 proceeds can’t be used toward education-related tax credits on your tax return, like the American Opportunity Tax Credit or the Lifetime Learning Credit. Likewise, you won’t be able to claim deductions on tuition and school fees if you used tax-free 529 money to pay for them.

529 proceeds also don’t cover certain unqualified college expenses, like transportation — even if it’s an airline ticket to and from campus between semesters. Off-campus commuter students may even have difficulty using 529 money to pay for room and board. To confirm what your 529 proceeds may cover, contact the plan manager and the school and verify what is and isn’t covered. Tuition, books and supplies should be covered universally. Devise a withdrawal plan to make sure your investment is maximized.

4. Watch out for penalty fees

College 529 plans are a lot like individual retirement accounts (IRAs): Withdraw your earnings too soon and you may incur a penalty fee. Specifically, if you take out any dollars before the account beneficiary incurs any qualifying expenses (before your tuition bill is due) or for any non-qualifying expense (such as a medical bill), a 10% penalty can be imposed.

There are some exceptions to withdrawing money early for non-qualifying expenses, including if an account’s beneficiary becomes disabled, dies or receives a scholarship or another type of educational assistance.

Through the House Ways and Means Committee’s Secure Act, however, you may also be able to use a 529 distribution to repay up to $10,000 of your (or a sibling’s) student loan debt. The pending legislation was passed in the House and was awaiting Senate confirmation as of the end of May 2019.

5. Other fees may apply, too

Several fees and ancillary expenses may apply to your 529 savings plan. On a prepaid plan, you’ll likely have to pay enrollment and administrative fees upon withdrawal of funds. College savings plans charge the same, often with the inclusion of an asset management fee, which may depend on the type of investment you have in place.

However, depending on the 529 plan in your state, you might be able to get some of these fees waived if you carry a large account balance or have an automatic deposit plan set up.

6. Don’t withdraw from the wrong 529 account

If you’ve got more than one 529 plan, you’re making a mistake if you withdraw randomly from any account — even the one with the highest balance.

Check your investments and see which ones have the best investment growth rates. Tap into those savings to receive the best tax breaks. Like any investment, gauging a plan’s growth potential ensures that you’ll be earning enough money to contribute aggressively toward college tuition.

7. Don’t pass on 529-based credit card rewards

For 529 donors with excellent credit, consider opening a credit card designed to complement your 529 plan. Some of them will give cash back or other rewards points that can be used toward your investment. These cards include:

  • CollegeCounts 529 Rewards Visa® Card (Alabama)
  • Bright Directions 529 Rewards Visa® Card (Illinois)
  • Upromise® Mastercard®

Some of these cards may not offer the same cashback or rewards percentages and also may not align with 529 plans in certain states, so make sure to read the fine print before applying.

8. Pay careful attention to withdrawal timing

529 withdrawals won’t always qualify for a tax break if you don’t use them for qualifying educational expenses within the same tax year, so make sure your timing is right. Experts recommend keeping detailed records — not only for the IRS, but your own financial activity — since a withdrawal made at the wrong time could compromise reimbursing your expenses.

Remember that there are three ways to withdraw money from a 529 college savings plan:

  • Distributing the money to the account holder
  • Distributing to the beneficiary (most likely the student)
  • Distributing to the school

In this case, itemize and document every single tuition, school supply or related expense in the school year so that your 529 contributions are maximized to their fullest potential.

Also keep in mind that a beneficiary could receive no more than $15,000 in a given year before the IRS could impose a gift tax. Before making a withdrawal beyond that amount, you might ask a financial professional or tax professional about the repercussions.

No two 529 plans are alike, so you should manage yours uniquely. Invest and maintain your account according to the schools you’re considering, what the tuition may be and by locking into the best investments and interest rates available at the time you open.

Don’t sit idle. Monitor your investments and see how they grow over the years. If college is years ahead for you, a child or grandchild, it gives plenty of time to cultivate your 529 college savings plan and watch your money grow into something to keep college affordable.

Andrew Pentis contributed to this article.

Interested in refinancing student loans?

Here are the top 6 lenders of 2021!
LenderVariable APREligible Degrees 
1.89% – 5.99%1Undergrad
& Graduate

Visit Splash

1.99% – 5.64%2Undergrad
& Graduate

Visit Earnest

1.91% – 5.25%3Undergrad
& Graduate

Visit Lendkey

2.25% – 6.88%4Undergrad
& Graduate

Visit SoFi

1.89% – 5.90%5Undergrad
& Graduate

Visit Laurel Road

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of Feburary 1, 2021.

2 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.

3 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.

4 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 7.33% APR (with AutoPay). Variable rates from 2.25% APR to 6.88% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.13% plus 2.37% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The discount will not reduce the monthly payment; instead, the interest savings are applied to the principal loan balance, which may help pay the loan down faster. Enrolling in autopay is not required to receive a loan from SoFi. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.  

5 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.


This information is current as of January 4, 2021. Information and rates are subject to change without notice.