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College savings: 3 things you didn’t know about 529 Plans

Pink Piggy Bank for Body and Soul column on obsessive piggy bank collecting.Pink Piggy Bank for Body and Soul column on obsessive piggy bank collecting.
Pink Piggy Bank for Body and Soul column on obsessive piggy bank collecting.Photograph by David Cooper Toronto Star via Getty Images

This week, global consulting and accounting firm PwC announced it would help junior employees pay down their student loans starting next July. The perk – up to $1,200 a year for up to six years – will be available to the 22,000 associates and senior associates the firm employs, more than 45% of their employee population. There are no restrictions or limitations, a PwC spokesperson says. “You get it by signing up for the benefit and if you leave the firm you do not have to pay it back.”

That, considering the current student loan landscape, is a very good thing. The class of 2015 is the most indebted in history. On average, students will have to repay more than $35,000 (there is currently $1.3 trillion in total student loan debt outstanding.), according to Mark Kantrowitz, publisher of With salaries stalled and underemployment still problematic, paying back these loans is no picnic. Research has shown millennials are delaying major life milestones, including buying homes, getting married and having kids because of their debt burdens.

It may be a little late for this generation of grads (although options to refi are booming) but as we turn to the next, new research is showing that our college funding strategies could use some tweaking. Nearly one-third of parents who are saving for their kids’ college education are instead stuffing the money into their 401(k)s and other retirement accouts, according to the 2015 Financial Trade-Offs Survey from T. Rowe Price. And when asked where they’re saving for college, about one-third of parents said 529s. Also worrisome, some 45% of parents are using regular savings accounts as their vehicles.)

Both moves, experts agree, are strangely off base. Money can’t be withdrawn from 401(k)s before age 59 1Ž2 to pay for college without being subjected to income taxes and a 10% penalty. It can be borrowed, but if you leave your job while the loan is outstanding for any reason the money has to be repaid in 60 days or it will be treated as a withdrawal. And, with an average interest rate of 1Ž2 of 1%, money in plain vanilla savings doesn’t provide the growth needed to keep up with taxes much less keep up with the tuition inflation that has been rising faster than regular inflation for decades.

Why isn’t the rate for contributing to a 529 – which nets you valuable state tax benefits in 35 states – higher? “We’ve seen a lack of knowledge about 529s,” says Kathryn Flynn, Content Director for “People don’t understand them and get nervous.” T. Rowe’s research backs that statement up. When asked why they weren’t using a 529 to save for college, 28% of respondents said they don’t know what it is. Even those people who know what 529s are may not be clear about how they work. So, let’s clear up a few misconceptions.

Access: Twenty-five percent of T. Rowe’s respondents cited lack of access as their reason for not saving in a 529. In fact, you can withdraw your contributions at any time. If you don’t use the withdrawal for qualified higher education expenses, however, you have to pay a 10% penalty and income taxes on the earnings.

Financial aid implications: Fifteen percent of respondents said they believe saving in a 529 means they won’t be able to get financial aid. That’s also largely wrong. Money in a 529 will impact your financial aid offers, but not by as much as funds in other accounts. The key: 529 funds need to be owned by the parents. Then, every dollar in a 529 will result in a reduction of 5.6 cents from your federal, need-based, financial aid package. By contrast, money in a child’s name (in a savings account), a parent’s IRA or a grandparent-owned 529, can reduce aid offers by much, much more.

Residential confusion: A survey showed that 20% of respondents believe the only plan they can contribute to is the one offered by their home state. False. You can contribute to any state plan, although you only get the tax benefits if you reside there. In some cases, you’re better off contributing to a plan with either better performance or lower fees. You can compare state plans at

Walecia Konrad contributed to this report.