Which is Better for Saving Up Money for College: a 529 Savings Plan or a Savings Account?


Flickr user Daniel Oines

Before sending their students off to a faraway campus for a magical learning experience, it is imperative that parents know how, exactly, they will pay for the sizable bills they’ll receive in return. Luckily, there are myriad options for parents who like to plan ahead, ensuring the stability of both their future and their child’s education. As many who have explored the subject know, there are two paths for a college planning account that are much more popular than any other: a 529 savings plan or a savings account. If you don’t know the difference, or you’re not entirely sure what plan would be best for you or your family, this brief run-through of the benefits of each should help you decide.

College Tuition Costs

The Argument for a 529 Plan

Offered around the country, 529 plans are nearly synonymous with college payment accounts and are probably the most popular option for parents who value advantages in taxes when saving money. So named for the chunk of Internal Revenue Code they sprung from, Section 529, the specifics of these plans vary from state to state, although the basics remain about the same.

Simply put, a 529 plan, officially a “qualified tuition plan,” is basically a credit system that will be applied to your child’s future tuition. Within the umbrella heading of “529 plan,” there are two subgroups; a 529 savings plan or a prepaid plan. We’re focusing specifically on the first option here, which are based heavily on the performance of the financial market at large. This means that the fluctuation of several factors—including the federal and local economy—play a role in pricing. A 529 savings plan is a better option for many than a prepaid plan, because prepaid plans are tied to the current market tuition prices. This means that you commit to paying the current college tuition rate AT THE TIME YOU OPEN THE ACCOUNT, even if the rate drops by the time your child is ready to go to college.

On the other hand, a 529 savings plan is more straightforward. In this option, you’ll deposit money, starting with as little as ~$20, over the years until you reach a hard cap, which changes depending on your state but is usually between $300,000-$500,000. 529 savings plans include built-in tax benefits and scholarship opportunities due to their unique execution. 529 plans remain an extremely popular option, with well over 12 million individual accounts open nationwide as of last year. For more information, check out your state’s Direct Plan website to find out how to add your name to the list.

The Argument for a Savings Account

It’s said that all actions have an equal and opposite reaction, and the spiritual opposite of a 529 savings plan is a private savings account. College savings plans do not, obviously, entirely reflect the type of person you are, but in this case, there are some easy connections. If you’re a micro-manager who enjoys overseeing your own finances, odds are you’ll opt for a private savings account. These can be opened from the comfort of your own bank and will be adjacent to your general finance accounts.

Unlike the money in a 529 plan, which is specifically branded, so to speak, for college tuition, the money in a private savings account can be used for anything, at any time. This can either be a drawback or an asset depending on how you look at it. However, families who are concerned about burying funds in a 529 account that they cannot touch will find solace in the flexibility of a private plan. In case of a financial emergency, the funds in the private account can be reallocated to help keep a family confront more pressing needs.

Ultimately, the decision is personal. While 529 plans are popular for their tax breaks and concrete certainty, savings plans are also a great option for their flexibility and power of oversight. There are great arguments on both sides, and pros and cons to each, but your family should be able to decide which route to take after a bit of research.

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