A 529 plan is one of the most powerful tools families can use to prepare for the cost of college. These tax-advantaged accounts are specifically designed to help parents, grandparents, and other family members save for future education expenses.
But not all 529 plans are the same. In fact, there are two distinct types of 529 plans—and understanding the differences between them is critical for choosing the right strategy.
At College Benefits Research Group (CBRG), we help families navigate the details of college funding, including how to use 529 plans in a way that maximizes savings, aligns with financial aid goals, and avoids common pitfalls. Here’s what you need to know.
Why 529 Plans Matter for College Planning
With college costs rising year after year, many families feel overwhelmed. The average cost of attendance at a four-year college—including tuition, fees, room, and board—now exceeds $25,000 per year for in-state public schools and $55,000 for private institutions.
529 plans were created to encourage families to start saving early and often. These plans offer:
- Tax-free investment growth
- Tax-free withdrawals for qualified education expenses
- Flexibility in use across hundreds of institutions nationwide
- Estate planning advantages, including gift-tax benefits
Families who start early can accumulate significant savings with the right investment approach. But knowing which type of plan to choose—and how to use it strategically—makes all the difference.
Overview of the Two Main Types of 529 Plans
There are two types of 529 plans:
1. Education Savings Plans (ESPs):
These are investment-based accounts that work similarly to a 401(k) or IRA. You choose from a menu of investment options, and the account grows based on market performance.
2. Prepaid Tuition Plans (PTPs):
These plans allow families to lock in current tuition rates at participating colleges (typically in-state public schools) by prepaying future education costs.
Both plan types are sponsored by individual states and offer some common tax advantages, but they operate very differently. Let’s take a closer look at how each one works.
How Education Savings Plans Work
Education Savings Plans are by far the more common and widely used type of 529 plan.
Here’s how they work:
- Contributions are invested in mutual funds or ETFs based on your selected portfolio
- Growth is tax-deferred, and withdrawals are tax-free if used for qualified education expenses
- Qualified expenses include tuition, fees, books, computers, and some room and board
- Funds can be used at nearly any accredited college or university in the U.S. and many abroad
These plans offer maximum flexibility in terms of where the student attends school and how funds are used. They also allow for higher potential returns because the money is invested in the market. However, they also carry some risk—your balance could fluctuate based on market performance.
Families can often customize their investment strategy based on the child’s age and risk tolerance, using age-based portfolios or custom allocations.
How Education Savings Plans Affect Financial Aid
On the FAFSA, parent-owned Education Savings Plans are treated as a parent asset and assessed at a low rate (up to 5.64%). Distributions are not counted as income if used for qualified expenses.
For schools that use the CSS Profile, the treatment is similar, but rules may vary slightly. CBRG helps families navigate both.
How Prepaid Tuition Plans Work
Prepaid Tuition Plans allow you to purchase future tuition at today’s prices. This is appealing for families who want a guaranteed return without the risk of market fluctuations.
Here’s how they work:
- You pay into the plan based on the current tuition cost at participating schools (typically public universities in the sponsoring state)
- When the student attends a participating school in the future, the tuition is fully or partially covered
- Some plans offer refunds or transfers if the student attends a private or out-of-state college, though the value may be less
These plans can provide peace of mind for families committed to in-state public institutions, especially in states with strong university systems.
However, they are less flexible and can limit your options if your student’s college plans change. Not all states offer Prepaid Tuition Plans, and participation rules vary.
How Prepaid Plans Affect Financial Aid
Prepaid Tuition Plans are treated similarly to Education Savings Plans on the FAFSA. However, for CSS Profile schools, the treatment can be different, especially if the plan is owned by someone other than the parent.
CBRG works with families to make sure 529 usage is aligned with institutional policies as well as federal aid rules.
Pros and Cons of Each 529 Plan Type
| Feature | Education Savings Plan | Prepaid Tuition Plan |
|---|---|---|
| Investment Growth Potential | High (market-based) | Low (guaranteed tuition value) |
| Flexibility in College Choice | High | Low (often in-state only) |
| Risk Level | Moderate to High | Low |
| Inflation Protection | No guarantee | Yes (locks in tuition rates) |
| Usage Options | Broad (tuition, books, housing) | Limited (tuition only) |
When deciding which plan is right, families should consider:
- The student’s likely college path (public vs. private, in-state vs. out-of-state)
- Their risk tolerance and investment timeline
- How financial aid eligibility may be affected
- Whether multiple family members may contribute
Special Considerations for New Jersey Families
New Jersey offers a state-sponsored Education Savings Plan called NJBEST 529, administered through Franklin Templeton.
Key features include:
- State tax deduction for NJ residents contributing to NJBEST
- Eligibility for scholarship awards of up to $3,000 for NJBEST participants
- Usable at nearly all accredited colleges, not just those in New Jersey
- Integration with NJ aid programs like NJ STARS and EOF
However, New Jersey does not currently offer a Prepaid Tuition Plan, so families seeking that option must look to other states that allow out-of-state participation.
CBRG helps New Jersey families evaluate whether NJBEST is the best fit or if a different state’s 529 plan might offer better investment options or lower fees.
How CBRG Helps Families Choose and Use 529 Plans Effectively
Selecting and managing a 529 plan is more than just choosing an account. It’s about creating a strategy that integrates college savings with financial aid, tax planning, and student goals.
CBRG helps families:
- Choose the right 529 plan based on academic and financial goals
- Optimize parent vs. grandparent ownership based on FAFSA and CSS Profile rules
- Avoid timing mistakes that could reduce financial aid eligibility
- Integrate 529 plans into multi-year funding strategies
In one real case, a CBRG client with a high-performing student was considering an out-of-state private college. By repositioning their 529 funds and coordinating with their broader aid strategy, they were able to preserve over $25,000 in institutional grants while still using tax-free savings to cover remaining costs.
Frequently Asked Questions About 529 Plan Types
Generally no, but you can roll over funds from a Prepaid Plan to an Education Savings Plan if needed.
Education Savings Plans offer more flexibility and are better suited for out-of-state or private colleges.
You can withdraw the equivalent amount from a 529 plan penalty-free, though you’ll owe taxes on earnings.
Unused funds can be transferred to another family member or kept for future education. New rules may also allow rollovers to a Roth IRA under specific conditions.
No. Anyone can open or contribute regardless of income.
Both are treated as parent assets if parent-owned, which has minimal impact. Grandparent-owned plans require more careful planning, especially for CSS Profile schools.
Yes. Up to $10,000 per year can be used for K–12 tuition, and both plan types can be used for graduate or professional programs.
529 plans are valuable tools—but only when used strategically. CBRG helps families get the full benefit of these savings vehicles while avoiding costly missteps that can impact financial aid or flexibility later on.