Pros and Cons of a 529 College Savings Plan


It’s official: our baby girl is 10 months old. A few nights ago Johnny and I found ourselves talking about her college plans — or rather, our plans for her college. Very funny joke! Nope, this is for real. Lest you think we’re jumping the gun, just remember school loans are the reason Johnny and I were in $20,000 of debt just a few years ago. And we’d like to help our little cupcake (or cupcakes… someday) start post-college life not in the red. Since I don’t anticipate coming into an inheritance right as our child starts college (or ever), we best start saving now.

We’ve thrown around the idea of a 529 college savings plan, but it wasn’t until recently that we really hashed it out and made the decision to move forward with putting money in one. There are pros and cons to a 529  plan, and some of those depend on the state in which you reside. So here are some general 529 facts we took into consideration as we made our decision of whether to invest:


  • Our contributions will be tax free!
  • We’ll get state income tax credit.
  • Even though we’ll save in one state, the money can be used for colleges and universities everywhere in the US.
  • Our money will grow! The money in a 529 plan is invested, similar to a mutual fund
  • If we start now, the amount we take out each month won’t be a huge burden, unlike the heart-attack-inducing amount we would need at the ready otherwise.


  • We won’t get federal income tax credit. Booooo.
  • The amount we save has to go toward college expenses. These include tuition, supplies, and room and board. BUT (this is a big but), you can transfer the money to another beneficiary (aka, your other children) if, say, little Tommy starts his own company in high school and doesn’t need college (because that’s usually the reason they don’t go, right?).
  • Any money that doesn’t go toward college expenses is subject to income tax and a 10% penalty. Not cool. Not cool at all.  So with a 529, it’s important that we save enough but not too much.

Despite the cons, we are pretty stoked to start putting money toward our girl’s college. Merry Christmas, hunny! Just kidding, we’re not those parents — although this year she wouldn’t notice if we were. We’re working on her noticing her own fingers right now. All of that said, because saving the right amount is pretty important with a 529, we came up with a plan for calculating how much to save each month for the next 17 years. I’ll be sharing that very soon!

What about our fellow parents out there? Do you plan to help pay for your kids’ college? What’s the plan?

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  • Reply melissa@the bix blog November 7, 2013 at 8:08 am

    i looking forward to seeing you savings plan and it makes me feel better than you are doing this (you are my money gurus). i also started a 529 for our boys lately as well!

    • Reply Joanna November 8, 2013 at 4:20 am

      That’s awesome, Melissa! It’s great to hear other parents thinking along the same lines as us.

      And if by “gurus” you mean “learning as we go and hoping for the best” then gurus we are!

  • Reply Brian November 7, 2013 at 8:28 am

    We have a 529 plan we contribute to (and so does my dad). We get a 20% tax credit (that is refundable in my state) on the first $5000 we put in each tax year. My dad also gets this credit. I don’t know too many investments that give me a 20% return right away and since

    As for the 10% penalty I am not worried. Give then time horizon, even if we had to pull the money out and pay the penalty we should still come out ahead. What we would probably do is just keep the money in the plan and probably use it for our grandkids one day.

    One more plus you didn’t mention. If your kid gets a scholarship you can withdraw money equal to the amount of the scholarship without a penalty.

    • Reply Joanna November 8, 2013 at 4:24 am

      You make some great points, Brian. And I love hearing the bit about being able to withdraw the amount of a scholarship with no penalty! I didn’t know that perk, so thanks for sharing. Now just to figure out a way to guarantee all of our kids get full rides…

    • Reply NYParent January 10, 2014 at 8:29 am

      Married couples can get a NYS deduction of $10,000 a year.

  • Reply Tara @ Streets Ahead Living November 7, 2013 at 8:31 am

    Two of my cousins were left money by their grandparent’s (not my relative side) through a trust that enabled them to either spend the money on education costs or healthcare costs. They were the only grandchildren of very successful grandparents so they were left a hefty amount. I think I prefer that option to a 529 plan but not everyone has rich parents who want to pay the college for their grandchildren so I’m sure it’s a rare option.

    The fact that you’re saving for your kids college is wonderful and I’m sure it will be appreciated!

    • Reply Joanna November 8, 2013 at 4:27 am

      What a great gift for grandparents to give. I’m hoping our children appreciate their 529s and decide to do the same for their own children!

  • Reply Emily November 7, 2013 at 8:52 am

    I’m not a parent but I am a (fairly) recent college grad who was blessed with a 529 account to help with things. My grandparents set them up for all the grandchildren (7 in total) and it has been amazing. As the oldest grandchild I was sort of the guinea pig for the rest of the kids as far as what it can be used for, etc but it went really well. I graduated with zero debt and was even able to use it to pay for an off campus apartment my junior and senior year (as long as it costs equal to or less than what on campus housing would cost it’s a go), to buy a laptop for school, and for school supplies each year. Those little things really add up when you’re a college kid on a budget.

    As far as kids deciding not to go to college, two of my cousins took that route and their money (after a certain period of time) was distributed amongst the rest of us. I’ve got about $10k left now to put towards my graduate school tuition (if I get in, fingers crossed) and as a real ‘adult’ with a zillion bills and responsibilities this has been an amazing, amazing blessing.

    Baby Girl is going to seriously thank you for this one, thumbs up, guys.

    • Reply Joanna November 8, 2013 at 4:30 am

      Wow, I really can’t think of a better way for grandparents to help with their grandchildren’s future. How awesome that your grandparents have done that for all of you! I love hearing that you’ve had such a positive experience with the whole process, Emily! Thanks for sharing!

  • Reply Richard November 7, 2013 at 9:31 am

    We started a 529 plan for our little (getting BIGGER) guy. Although, he’s only 9 months old, we also feel its important to begin to prepare for college. Just like any other big purchase – prepare now and worry less later.

    While, I know that college is important – I refuse to pay for something that my son (and hopefully more) abuse by not getting good grades or taking it seriously. We were thinking ofThat’s the best plan we have right now. So, we thought of having the money available, but making them try and pay their way. If they used loans, we would offer to pay them off with the 529 if they maintained a certain GPA (3.25 or better). it’s not fool-proof and it may change over next 17 years, but I think it’s good to start thinking about it.

    • Reply Becky @ RunFunDone November 7, 2013 at 9:46 am

      I love your thinking, Richard! My parents did not save anything for college, and while at times I’ve wished that they had, I also know that I worked my butt off in college because it was my own expense. I remember that in college, those of us who had to pay our own way took it a lot more seriously than those who didn’t. I’ve thought of a few ideas to help my kids out without letting them take it for granted: Things like paying for their tuition only for classes where they earn certain grades, and paying ONLY for tuition, not room or board or books. I actually like the second idea best, because it will keep them being frugal, since they’ll still have significant bills. That being said, my parents not paying didn’t work out as well for my little sister. She graduated, but she decided that she didn’t feel like working anymore for 2 years or-so, and just took out extra loans at that time!

    • Reply Brian November 7, 2013 at 11:37 am


      FYI… student loans are not always considered a qualified expense so you would not be able to use the 529 to do that without paying a penalty.

      Here is a link that kind of explains it (admins feel free to delete this link it won’t offend me):

      If you want to go that route you would be better putting money into a taxable account that they aren’t on.

    • Reply Joanna November 8, 2013 at 4:33 am

      That’s awesome you’ve already started a 529 for your little guy! Way to go. And I agree that there should be contingencies on paying for school. I’m sure when the time comes, you’ll know the balance between helping your kids out while keeping them appreciative!

  • Reply This Life On Purpose November 7, 2013 at 10:34 am

    What a cutie!
    We have RESPs here in Canada instead of the 529 with similar benefits I believe. My parents paid into one for me and I was truly grateful when the time came to pay for school! I’m sure she will thank you one day.

    • Reply Joanna November 8, 2013 at 4:34 am

      Awesome to hear about others who have received help via 529s or RESPs and what great experiences you have had!

  • Reply Newlyweds on a Budget November 7, 2013 at 5:18 pm

    We don’t have kids yet, but plan to within the next few years and I’ve already had a heated discussion with friends on whether we’re expected to pay for all of our child’s education or not. I think we will most likely do a 529 plan and try and save up a set amount for each child, but I will also expect my children to work and pay their way as well. And if they have to take out a few loans, well then that’s fine

    • Reply Joanna November 8, 2013 at 4:38 am

      It’s a hard decision to make, for sure! Johnny and I have discussed it at length and have decided just what we will and won’t pay for. While we didn’t love having loans, we did like that we both learned to work hard during college, both in school and in our jobs. Now the trick is to find that balance for our own kids!

  • Reply Rob November 7, 2013 at 6:38 pm

    Yep, higher education savings funds for the kiddos is a smart idea. We set up our Canadian RESP plans for our 2 kids when they were your little one’s age. I say “higher education” because these plans could be used not only for college expenses but also for other types of higher education / training expenses (eg. trade schools).

    It looks like your 529 plan is more generous than our RESP plan where you get a state income tax credit whereas we Canuk parents don’t get any tax breaks. Rather it’s our kids who eventually benefit from the proceeds of their RESP plans (ie., yearly proceeds from pooled contributions + investment earnings) without having to pay any taxes.

    Also, I’m not sure if things are still the same as when our kids were students but another condition of receiving annual RESP benefits was that each student had to successfully pass each student year’s exams. Flunk any given year (leading towards eventual graduation) and the remaining RESP benefits were forfeited. It kinda encouraged each kid to study hard and have “some skin in the game”.

    • Reply Joanna November 8, 2013 at 4:40 am

      That’s awesome you did that for your kids, Rob. Our 529s can be used for trade schools as well. And it’s nice to hear that we *finally* have something more generous in our country than in Canada. It seems like it’s always the other way around! 🙂

      That’s a really interesting caveat for your RESPs. I’m not sure if that’s a requirement for 529s. Something I’ll have to look into!

  • Reply Tarynkay November 7, 2013 at 8:39 pm

    We haven’t started a 529 for our two year old son. I don’t know that we will- we are saving for his future, and we plan to pay for his college if he decides to go, but we don’t want to be locked into having to spend the money on college. He might want to go into the trades or become a chef or a rockstar- who knows? I think that part of our hesitation comes from having lots of friends and family members who haven’t gone to college but are doing very well for themselves. For instance, my electrician brother-in-law makes more than my architect husband, with better hours and no student loans! I also think that the higher education bubble is overdue to burst, so everything could look completely different 16 years from now.

    My husband and I both paid for college ourselves. Our parents didn’t help at all. They did expect us to go, they just also expected us to pay for it. We managed with a lot of scholarships and some student loans that we are still struggling to pay off. I really wish we didn’t have the student loan debt, but c’est la vie, right?

    • Reply Joanna November 8, 2013 at 4:45 am

      I didn’t mention this in the post, but 529s can go toward trade schools and the like, so they’re really not too limiting. That said, it still might not be the best option for you guys… everyone has to weigh the pros and cons personally.

      And way to go on both working your way through college on your own! Johnny and I know how that feels for sure. We didn’t love the loans either, but it was the only way we could get through! And it’s what has made us so determined to help our own kids with their schooling, so I guess it did us some good.

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  • Reply Jenna Kaye November 13, 2013 at 1:30 pm

    Can’t wait so see your post about your savings plan.

  • Reply Amy November 16, 2013 at 4:05 pm

    I am not sure if you guys are aware of this or not but when you set up baby girl’s 529 make sure you set it up in your name with her as the beneficiary and not in her name. This will make a difference down the road when she goes to apply for financial aid. If the money is in her name she is expected to use 100% of it for her education before she qualifies for aid but if it is in the parents name with her as the beneficiary the % of the 529 expected to be used before she qualifies for aid is only like 10-15% (I can’t remember the exact percentage off the top of my head but it is a lot lower.) I hope this helps. Good luck.

    • Reply Johnny November 20, 2013 at 2:02 am

      We had thought to go the beneficiary route, but not for this reason. And we’re really glad you mentioned it because that’s all news to us.

      This is why we love doing our blog: crowdsource our financial ignorance out to the Internet and let smart, nice people fill in the gaps for us. 🙂

  • Reply Mr. Bill November 24, 2013 at 11:29 pm

    You may also want to consider a Coverdell Education Savings Account. They have annual $$ contribution restrictions, but your investment options are much greater and fees can be much less. Over time these features should help the investments grow larger.

    • Reply Johnny December 3, 2013 at 2:04 am

      Thanks for the heads up, Bill! I had only heard a few thing about ESAs, but we’ll make sure to give them a second look now.

  • Reply Racheal March 13, 2015 at 12:29 pm

    I am doing some research and reading some old posts. 🙂

    I am trying to decide on a college savings plan and my financial adviser suggested that I open a Roth IRA to save for our kids’ college.

    We are still paying off debt (almost done!), but after some research I think I want to save my Roth IRA for MY retirement. Ha! Is that selfish?

    I guess my question is, if you didn’t do a 529, what would you do to save?

    Also, I loved reading the comments here and learning that you can get the scholarship equivalent back and about the idea of passing it on to grandchildren if your children don’t use it.

    Again, thanks so much for all that you do! <3

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