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Written by Kyle Crouthamel, CPA, CFE, Manager

The cost of tuition at a public, four-year institution increased 31.4% in the decade between 2010 and 2020. This equates to an annual increase of about 3.11% per year, which is modest compared to the preceding four decades that saw average annual increases of 9.19% (2000s), 7.74% (1990s), 12.21% (1980s) and 8.73% (1970s). These rising costs have driven post-secondary education to become a significant financial burden for both parents and students.

Like most large financial purchases, proper planning and saving alleviate the load. Amid the multiple ways to save for higher education, Qualified Tuition Plans, typically referred to as “529 plans” from their Internal Revenue Code section, are commonly at the top of the list.


529 plans offer contributions to be invested and grow tax deferred. Contributions do not offer a federal tax deduction; however, 35 states and the District of Columbia offer deductions against state income taxes.  Tax deferred growth means that any income earned on your contributions will not be taxed so long as it meets the qualification to be distributed tax-free. Distributions from plans are tax-free if they are used for qualified educational expenses, a list which has expanded in recent years.

With growing popularity, 529 accounts can offer a wide range of investment options that allow owners to tap into the stock market for development of the plan. Investment options can be as conservative as a certificate of deposit or as aggressive a growth-based mutual fund.

Another key highlight, enacted with 2017 Tax Cuts and Jobs Act, is that withdrawals can be used for tuition costs to private or religious schools for kindergarten through 12th grade. While it remains advantageous to use 529 Plan accounts to save for college, parents paying grade school tuition and living in the previously mentioned 35 states and the District of Columbia can trim their state tax owed by strategically timing deposits and withdrawals to a 529 Plan with little to no market risk.

Financial Aid Impact Considerations

When post-secondary students file the Free Application for Federal Student Aid (FAFSA) for each preceding college year, an Expected Family Contribution (EFC) is calculated. Beginning July 1, 2023, EFC will be replaced with the term “Student Aid Index” (SAI). The EFC/SAI considers your family’s income, assets, benefits, family size, and number of family members attending college. The cost of attendance at each institution is reduced by your EFC/SAI to calculate the need-based financial aid you can receive. Therefore, the higher the EFC/SAI, the less the amount of aid you will qualify for.

Income accounts for as much as 50% when calculating EFC/SAI, whereas a maximum of 5.64% of 529 account balances are counted. Proper distribution planning on 529 accounts is essential to maximizing their effectiveness. Withdrawals from 529 plans are tricky because distributions from accounts owned by parents or children, when used for eligible expenses, are omitted from the FAFSA. However, distributions from plans owned by a someone else (i.e., grandparent, aunt, uncle) have the same impact on financial aid as taxable income. For example, a distribution of $30,000 from a grandparent-owned 529 will factor into the following FAFSA the same way $15,000 of income will.


When properly used, a 529 plan can be a successful way to alleviate education costs by taking advantage of acceptable tax avoidance strategies. Many use 529s to save for college in the long-term, several choose to use them to pay for schooling in the short-term, others use them as a combination of both. Whichever the rationale, the use of a 529 plan should be considered to relieve the financial commitment of education.