Before determining the best college savings plan for you, let us take a look at annual tuition costs. According to the College Board, the most recently published figures of the average annual cost of tuition and fees were…
$11,950 for public in-state students (4-year).
$31,880 for public out-of-state students (4-year).
$45,000 for private nonprofit universities (4-year).
These are published (“sticker”) tuition-and-fee averages; net costs can be materially lower after grants and scholarships.
Thankfully, much like tax-advantaged accounts designed to help us save for retirement, there are tax-advantaged accounts designed to help families set aside funds for future college costs – 529 savings plan. There are two types of tax-advantaged college savings programs: college savings plans and prepaid tuition plan, the former being the most popular.
The attraction of the 529 savings plan is that both provide for investment earnings to grow on a tax-deferred basis. In addition, funds used to pay for qualified education expenses may be withdrawn free of tax. That makes investment growth switch from tax-deferred to tax-free – woohoo! Your state may also offer a tax deduction for 529 plan contributions. In MA, individuals are able to deduct up to $1,000 and couples $2,000 when contributing to the Fidelity MEFA plan. Given MA has a state tax of about 5%, this doesn’t work out to a huge savings – but still worth mentioning.
Prepaid Tuition Plan vs. College Savings Plans
One type of 529 program is the prepaid tuition plan, which allows you to lock in tuition rates at eligible state colleges and universities.
Most are sponsored by state governments and allow account holders to “purchase” tuition at today’s rates and “redeem” the credits in the future when your child is going to college. In effect, the state is absorbing tuition increases during the years in between.
Example from MEFA: Let’s say you contribute $1,500 to your U.Plan to cover 10% of a year of mandatory fees and tuition now at a given school ($15,000). If the tuition and mandatory fees increase to $25,000 over the life of your U.Plan, that Tuition Certificate will still cover 10%, or $2,500, of tuition and mandatory fees at that school, meaning you saved $1,000.
Pre-paid tuition plans allow you to pay for tuition in one payment today or through installments, but generally don’t cover expenses such as room and board. Your contributions are then pooled with other plan participants and invested by the state, then transferred to the appropriate school when your child starts college. But since the state is managing the investments, you have no investment options (but this also makes managing the account less complicated for the investor).
In contrast, college savings plan typically offer several investment options, at varying levels of risk, depending on how close the child is to college. Plus, college savings plans allow students to attend any accredited post-secondary school, public or private, irrespective of the state where you live or where the college is located. This factor alone is usually the straw that sways families to choose a savings plan vs a pre-paid plan.
In addition, although the investments are managed by a state-designated professional money manager – typically through mutual funds – and are allocated to mutual funds based on the age of your child (the beneficiary), you generally get to determine which investment is appropriate for you, based on your risk tolerance and other factors.
The investment objectives of the mutual funds are also what most people are familiar with: equity mutual funds, fixed-income mutual funds and money market mutual funds or age-based mutual funds that shift the allocation among stocks, bonds and cash depending on the age of your child.
The following chart was copied from the Securities and Exchange Commission which can help you determine the best college savings plan. It outlines many of the major differences between prepaid tuition plans and college savings plans:
Which is the Best College Savings Plan For You?
Your own financial situation will determine whether a prepaid tuition plan or college savings plan is the preferred vehicle to help someone through college. Part of this determination includes the effect that either will have on your student’s financial aid eligibility and your own estate planning.
The decision may come down to availability as well. There are not that many states providing prepaid tuition plans and accepting new applications. While this list is always changing, currently 10 states seem to be accepting new applicants: Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington. I’m obviously largely familiar with the Massachusetts option, MEFA UPlan, which is run through Fidelity. They are currently working with 70 schools within the state. That said, a handful of years ago the program included 80 schools, so I wonder the trajectory of the program in terms of it having enough variety to meet your child’s education goals.
Also worth mentioning, pre-paid options mean relying on a state to fulfill a financial guarantee, especially with shrinking state budgets. New Mexico, for example, terminated its program altogether; Colorado is no longer open to new account holders; and Alabama froze its payouts at 2010 levels.
Like the tax savings… but worried about the flexibility of a 529 Savings Plan?
As mentioned above, a savings-based 529 plan offers more flexibility than a prepaid tuition plan because you’re not limited to a specific list of colleges. But beyond school choice, clients often ask a very practical question: what happens if all the money isn’t used?
Parents are always crossing their fingers for a full-ride scholarship — a good problem to have — and fortunately, there are several reasonable outcomes if that happens.
First, each 529 account names a beneficiary, but that designation is not permanent. If one child doesn’t use their full balance, the account can easily be re-designated to another child or to another qualifying family member, including siblings, cousins, parents, or even yourself.
Second, 529 funds aren’t limited to undergraduate education. Accounts can also be used for post-graduate education, such as an MBA, law school, medical school, or other qualifying graduate programs.
If a scholarship is part of the equation, you’re allowed to withdraw an amount equal to the scholarship without paying the 10% penalty. You would still owe ordinary income tax on the earnings portion of that withdrawal, which is the same treatment those gains would have received had the money been invested in a taxable brokerage account. Fair enough.
One important caveat: the scholarship-related distribution must be taken in the same year the scholarship is awarded. You can’t wait until graduation and then retroactively justify a withdrawal. This timing mistake is more common than you’d think – do not fumble it!
New flexibility from SECURE Act 2.0 and OBBBA
The SECURE Act 2.0 introduced a major planning improvement for unused 529 balances: the ability to roll funds into a Roth IRA for the beneficiary.
If the 529 account has been open for at least 15 years, unused funds can be rolled into a Roth IRA for the same beneficiary, subject to several limits:
Rollovers count toward the annual Roth IRA contribution limit for that year
The lifetime rollover cap from a 529 is $35,000 per beneficiary
Contributions (not earnings) made to the 529 in the last five years are excluded
For example, if $20,000 remains in a 529 and there’s no other child to re-designate the account to, you could gradually roll that balance into the beneficiary’s Roth IRA over several years — staying within annual contribution limits — once the 15-year requirement is met. This creates a powerful bridge between unused college savings and long-term retirement assets.
More recently, the One Big Beautiful Bill Act (OBBBA) expanded what 529 plans can be used for going forward, further increasing their flexibility relative to prepaid tuition plans. Under these changes, 529 savings can now be used for:
K–12 tuition expenses, up to $20,000 per year per student.
Career credentialing and workforce training programs, not just traditional college degrees.
The “do nothing” option
Finally, there’s always the option to leave the account intact if it isn’t fully spent on a child’s education. Some families choose to keep unused 529 balances for future grandchildren, giving the next generation a head start on college savings. With no required distribution timeline, the account can continue growing tax-free until it’s needed. In my opinion, it’s an incredible way to transfer wealth.
