Rising Student Loan Interest Rates Highlight Advantages of 529 Plans
The cost of borrowing with student loans is getting more expensive. This month, the interest rate on federal undergraduate student loans will hit 6.5%—the highest rate since 2008, making saving for college through a tax-advantaged 529 plan look better than ever.
For a student who takes out a 10-year student loan of $28,000 under this new rate, the borrower would expect to pay about $10,000 in interest, or around 35% more for college than a student who pays for college through savings or other options, according to College Money Matters.
While student loan interest rates are on the rise, grant and scholarship funds available to students have declined. Between 2011 and 2023, total financial aid offered to undergraduate students dropped from $248 billion to $177 billion, based on information from The College Board. Meanwhile, college costs continue to increase. The College Board states that in the past ten years, in-state tuition and fees at public four-year universities grew at an average rate of 2.2% beyond inflation, with per-year cost per student reaching $28,840 in 2023-2024.
Parents and Students Reap Benefits of 529 Savings
Parents can avoid this rock-and-a-hard-spot situation by setting up a tax-advantaged 529 savings account with The Education Plan® for their child. Named for Section 529 of the federal tax code, 529 plans are tax-advantaged college savings plans designed to make post-secondary education more affordable for families.
Students can use these funds for many forms of post-secondary education, including college,
vocational school, professional school, and even graduate degrees. 529 plans let your earnings grow without federal tax, and the money you withdraw is also federal tax-free as long as it's used to pay for qualified education expenses, including tuition, room/board, books, supplies, and more.
If you're a New Mexico taxpayer, you are able to deduct your contributions to The Education Plan from your state income taxes.
Opening a 529 plan for your child or children may be even smarter than choosing a taxable savings account or similar investing option. In a hypothetical example, a family investing just $150 per year into a 529 plan can potentially earn around $10,000 more over 18 years, compared to a traditional taxable savings account.*
It's simple. By consistently investing in a 529 plan over the years leading up to your child's
future education, you'll save more in these tax-advantaged accounts without facing the additional cost of interest rates associated with student loans and other borrowing options.
Getting Started is Easy
If you haven't opened a 529 plan for yourself or a family member, it's easy to do. Any U.S. resident with a Taxpayer Identification Number (TIN) or Social Security number can open a 529 savings account with The Education Plan.
Visit our Learning Center for more detailed information on the tax advantaged benefits of 529 plans, including instructions on how to open an account, ideas for saving, which family members qualify to receive these benefits, when and how to take withdrawals, how to choose or change a plan beneficiary, and much more.
*This hypothetical example is for illustrative use only and does not reflect an actual investment in any specific 529 plan. Families are assumed to be in the 24% tax bracket during contribution and distribution. The hypothetical example assumes a monthly contribution of $150, return on investment of 7% and no withdrawals during the 18 years. Actual returns may vary.
Frequently Asked Questions
A 529 plan is a tax-advantaged investment account that is designed to grow savings for future education expenses for a specified beneficiary. 529 plans offer unique benefits and features that make them an appealing strategy for education related saving.
A 529 plan can be used for “qualified educational expenses.” For federal tax purposes, qualified educational expenses include:
- Tuition and fees at accredited higher education institutions
- Books
- Supplies and equipment
- Room and board for beneficiaries attending on at least a half-time basis.
- Computer technology, equipment, and internet access
- Up to $10,000 a year for K-12 tuition and expenses (Limit increase to $20,000 in 2026)
- Expenses for educational special needs services
- Transfers to an ABLE account for the beneficiary (transfer subject to annual limit)
- Apprenticeship expenses
- Up to $10,000 for student loan repayment
- Credentialing expenses and certification programs
- Roth IRA rollover for the beneficiary
If you're not sure if an expense is considered "qualified," we recommend consulting with a tax professional or advisor. Unqualified expenses will be treated like ordinary income: state and federal taxes will apply, with a 10% federal penalty for withdrawals from your 529 plan used to pay for them.
New Mexico residents can deduct contributions to The Education Plan from their state taxable income each year. This includes contributions made to an account that you are not the account owner of.
You cannot deduct contributions from federal income taxes.
Any person at least 18 years old with a valid Social Security Number (SSN) or Tax Identification Number (TIN) can open a 529 account. The account holder chooses the investment options, designates a beneficiary, and requests the distribution of funds.
The cost of college continues to rise, including tuition, housing, food and supplies, so it’s important to begin saving as soon as possible. You can learn more about how much a typical college education costs on our Cost of College page. It’s never too early or too late to start.
The Education Plan offers a variety of investment options to fit you and your family’s needs, risk tolerance and goals. You can see all of the available investment portfolios on the investments page.
Yes, you can use up to $20,000* a year to cover tuition and expenses for K-12 education.
Qualified K-12 expenses include:
- Tuition (public, private, and religious)
- Curriculum materials, books (including digital/online) and instructional materials
- Tutoring and instructional classes**
- Fees for a nationally standardized norm-referenced achievement test, an advanced placement examination, or any examinations related to college or university admission
- Dual enrollment program fees
Educational therapies for students with disabilities provided by a licensed or accredited practitioner or provider, including occupational, behavioral, physical, and speech-language therapies
*Starting in tax year 2026. The annual limit is $10,000 in tax year 2025 and permitted for tuition only.
**Tuition for tutoring or educational classes outside of the home, including at a tutoring facility, but only if the tutor or instructor is not related to the student and—
(i) is licensed as a teacher in any State,
(ii) has taught at an eligible educational institution,
or (iii) is a subject matter expert in the relevant subject.
You can open an account with The Education Plan online or by mailing in the enrollment form. In order to open an account, you will need the following information:
- Your social security number or TIN
- Your address
- Your bank account information (in order to fund the account)
- The beneficiary’s social security number or TIN
- The beneficiary’s birthday
-The beneficiary’s address
