Scholarships and 529 Plans: What You Need to Know
Saving for college with a 529 account is one of the best ways to plan for your student’s future. But because none of us can see into the future, many parents wonder what will happen to the funds in a 529 plan if their student gets a scholarship, and whether having a 529 plan will impact potential financial aid.
Having a 529 account does not prevent your child from getting scholarships, grants, or other financial aid. We break down the impact of a 529 plan on financial aid and scholarships, so you can stop hesitating and start saving with confidence.
Scholarships & Grants
Grants and work-study aid are federally administered and the funds do not need to be paid back. Such aid is typically need-based – primarily for those whose family income falls below a certain level. Aid recipients are decided by the federal government. Scholarships are sources of funds that are typically merit-based and provided by the college or university; they are for students who excel at academics, sports, or have some special talent.
If your student receives a scholarship or grant, the funds in a 529 account can be used to cover expenses not covered by the scholarship. Even if a scholarship or grant covers the full tuition at an institution, 529 funds can be used to cover other qualified expenses, including room and board, meal plans, books, technology like laptops and software, and even some study abroad expenses.
Funds in a 529 plan can also help a student “level up,” or attend a university that may have been out of reach financially without the combination of scholarships and savings.
FAFSA and Loans
Another type of student financial aid is federal student loans. The Free Application for Federal Aid (FAFSA) determines both the kind and amount of aid a student receives, including loans for which they are eligible.
Having a 529 account does not have a big impact on federal financial aid that your child may receive. The money in a 529 plan is not the student’s asset, but the parent’s and is treated as such in terms of federal financial aid. These 529 funds are considered when determining aid, but have minimal impact: eligibility for FAFSA can be reduced by no more than 5.64% of a 529 plan’s account value each academic year.
Next Steps
Once scholarships, grants, work-study, and federal loans have all been determined, the school’s financial aid office applies this money towards tuition, fees, room and board (if living on campus) and will send you a bill for remaining expenses. These other education expenses are up to you to cover, and this is the perfect time to use funds from your 529 college savings account. You can make tax-free withdrawals to cover the balance of your bill and for other qualified expenses, such as textbooks, laboratory fees, special needs assistance, even computers, printers, software and internet access, if required for courses.
According to the College Board, the average degree recipient in 2019-2020 took out $28,400 in student loans to pay for college. In combination with scholarships and financial aid, the funds in a 529 plan with The Education Plan can help students graduate with less debt and get a bright start faster.
There are many ways to pay for your child’s higher education, and the portion for which you are responsible depends on the amount and type of aid your child receives, as well as your savings and income. Now is the time to stop worrying and start focusing on making sure your student has the best possible college experience with the least possible amount of debt.
If you still have questions about financial aid and your 529 account, consider talking to your plan administrator, tax advisor, or financial professional.
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
