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College may feel like a lifetime away when you’re in the newborn phase. But the earlier you start saving, the less you’ll need to save later. Here’s a straightforward look at what 529 plans are, how they work, and why so many families are using them.
The rising cost of college
College costs have risen significantly over recent decades. According to the College Board, average published tuition and fees for in-state students at public four-year universities reached $11,950 in 2025–26 – and that’s before room and board, books, and other expenses are factored in.1 When all costs are included, in-state students at public four-year institutions paid an average of $30,990 per year in 2025–26. Students at private nonprofit colleges averaged $65,470 in total annual costs.1
Over the past decade alone, average tuition and fees at public four-year colleges increased approximately 27% for in-state students.2 A newborn today will start college around 2043. The earlier families begin saving, the more time their money has to grow.
What is a 529 plan?
A 529 plan is a tax-advantaged savings account designed specifically for education expenses. The name comes from Section 529 of the Internal Revenue Code, which authorized these accounts in 1996.3 Every state except Wyoming sponsors at least one 529 plan, and you are generally not required to use your own state’s plan.4
Think of it as a savings account with a built-in tax advantage: contributions are invested, grow tax-free, and can be withdrawn tax-free when used for qualified education expenses.3
What can 529 funds be used for?
Qualified expenses for federal tax-free withdrawals include:
- College tuition and fees at accredited institutions3
- Room and board (for students enrolled at least half-time)
- Books, supplies, and equipment required for enrollment
- K–12 tuition up to $10,000 per year per student (federal; state rules vary)5
- Registered apprenticeship programs5
- Student loan repayment, up to $10,000 lifetime per beneficiary5
Withdrawals used for non-qualified expenses are subject to federal income tax on earnings plus a 10% penalty.3
The tax advantages
At the federal level, contributions to a 529 are not tax-deductible, but the money grows tax-deferred and comes out completely tax-free when used for qualifying expenses.6 Over 10, 15, or 18 years, that tax-free compounding can make a substantial difference compared to a standard savings account.
At the state level, more than 30 states offer some form of income tax deduction or credit for contributions to a 529 plan (often limited to contributions to the in-state plan).7 Five states – Indiana, Minnesota, Oregon, Utah, and Vermont offer tax credits rather than deductions.8
How widely are 529s used?
As of December 2024, there were 17 million active 529 accounts in the United States, with a combined $525.1 billion saved, an increase of more than 11% from the year before.9 The average account balance was $30,960.4
Despite this, 54% of parents remain unaware of 529 plans, and only 35% of families use a college savings account of any kind.10 That gap represents a significant opportunity for families who start early.
What if my child doesn’t go to college?
529 plans are more flexible than many people realize. If a child does not attend a four-year college, funds can be used at eligible vocational schools, trade programs, and registered apprenticeship programs.5
The account owner can also change the beneficiary to another qualifying family member at any time without tax consequences.3 And beginning in 2024, unused 529 funds can be rolled over into a Roth IRA for the beneficiary (up to $35,000 lifetime) provided the account has been open for at least 15 years. This change was introduced by the SECURE 2.0 Act.11
The content in this post is for educational purposes only and does not constitute financial, legal, or tax advice. The Baby Collective does not endorse any specific financial products or providers. Please consult a licensed financial advisor before making any decisions for your family.
Want personalized guidance? Check The Baby Collective directory for financial advisors near you. Sitting down with a licensed professional is one of the best and most underused steps a new parent can take to protect their growing family.
References
1. College Board. Trends in College Pricing Highlights, 2025–26. https://research.collegeboard.org/trends/college-pricing/highlights
2. Bankrate. College Tuition Inflation: The Rising Price of Education. Updated August 2025. https://www.bankrate.com/loans/student-loans/college-tuition-inflation/
3. Internal Revenue Service. 529 Plans: Questions and Answers. https://www.irs.gov/newsroom/529-plans-questions-and-answers
4. BestColleges. 529 College Savings Plan Statistics. Updated November 2025. https://www.bestcolleges.com/research/529-college-savings-plan-statistics/
5. NextGen 529. How Can Grandparents Contribute to 529 College Savings Plans? Updated January 2026. https://www.nextgenforme.com/college-savings-guide/how-can-grandparents-contribute-to-529-college-savings-plans/
6. Charles Schwab. What Is a 529 Account? How It Works and Tax Rules. https://www.schwab.com/learn/story/saving-college-529-college-savings-plans
7. Saving for College. The “Grandparent Loophole”: Grandparent-Owned 529 Accounts & the New FAFSA. Updated January 2026. https://www.savingforcollege.com/article/new-fafsa-removes-roadblocks-for-grandparent-529-plans
8. The College Investor. 529 Plan and College Savings Statistics. Updated January 2025. https://thecollegeinvestor.com/529-plan-and-college-savings-statistics/
9. Investment Company Institute. Release: 529 Plan Program Statistics, December 2024. April 10, 2025. https://www.ici.org/research/stats/529s/529s_24_q4
10. Education Data Initiative. College Saving Statistics 2025. https://educationdata.org/college-savings-statistics
11. Fidelity. 529 Plans — College Savings Account. https://www.fidelity.com/529-plans/overview
