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 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.

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.