529 Plans and more: Innovative and effective ways to pay for education

Today, we talk about education as a lifelong journey. It starts with school, but it never really ends. The associated costs have also matured and now resemble longer-term budget items, such as housing and health care. Paying for education is a top priority for many parents, and it has become a major investment—one that often requires years of careful planning. As the costs keep rising, you should approach funding educational expenses, such as tuition, extension programs and advanced professional training, like any other kind of investment that needs a strategy built for your specific needs.

One of the most challenging aspects of crafting such plans is predicting the future educational funding needs for your loved ones or yourself. Each approach has pros and cons, and the right solution may be a mix of tried-and-true tools with innovative, lesser-known strategies to help plan for the uncertainty.

Here are some strategies that may help cover today’s expected and sometimes unexpected, educational costs.

Money that you contribute to a 529 account grows tax-free, and there are no taxes on withdrawals if they’re used for qualified expenses. For 2025, single persons can make contributions of up to $19,000 a year into a 529 plan—and married couples can contribute up to $38,000—without triggering the federal gift tax, assuming they did not make any other gifts to the same person. They can also take advantage of a feature unique to 529 plans that allows them to make five years' worth of contributions at once without triggering the federal gift tax.¹ If they don’t make additional gifts to the same person during the same five-year period, an individual can contribute up to $95,000 for 2025 and a married couple filing jointly can contribute up to $190,000 (these amounts may change in the future due to cost of living adjustments), provided they make the required election on a gift tax return for the year of the contribution.

Your Unified Lifetime Gift Credit, $13.99 million in 2025, may also be available to fund your account up to the account maximum contribution limit, which varies by state.

When saving for college in a taxable account instead of a 529, a portfolio of zero-coupon municipal bonds can be a good option. Rather than receiving interest, you purchase this at a substantial discount to its face value, which it pays in full at maturity, providing a lump sum equal to the initial investment plus imputed interest. A big plus with these bonds: when purchased from a government entity, their interest is often exempt from federal income tax and usually from state and local income tax as well.

When a gap looms between the cost of education and the ability to pay when due, most families reach for student loans by default. But they’re not always the right option. Interest rates on some student loans can exceed 8%; what’s more, for unsubsidized loans, that rate begins accruing the minute the loan is made, even though payments don’t start until after your child graduates.

Some parents, understandably, may want their children to have some "skin in the game"—and student loans certainly lock in the need for long-term responsibility. But you may want to balance that against the weight of educational debt that many students end up carrying long after graduation.

One strategy that parents often overlook is to borrow against their own assets. Parents can then make a loan directly to their children to pay for education. As a borrower, the child must still bear the responsibility of paying back the loan, which may carry lower interest rates. The family "lender" may choose to have the child refinance the loan upon leaving or finishing school, or, if it is not paid back, the "lender" may choose to deduct it from an inheritance or simply forgive the loan to the child.

529 plan account owners may also withdraw tax-free up to $10,000 to repay student loans, which often account owners plan to do if the student successfully completes their studies.

The best-laid plans must account for potential detours. Some children choose to take a gap year for travel, volunteering, or real-world job experience. Others may choose to attend college overseas or study abroad for a semester.

In some circumstances, you may be able to use 529 plan funds tax-free to pay for those options or some expenses related to them. For example, 529 funds may be used for eligible international schools. Additionally, there’s no time limit on 529 plans. The funds can stay invested and continue compounding while your child explores their passions.

If you’re planning to pursue a degree, it may be a good idea to name yourself the beneficiary of a 529 plan and use those funds to pay for your education. There are no age or time restrictions imposed by IRC Section 529 but check if the 529 plan under consideration has any such limitations.

The SECURE 2.0 Act contains dozens of provisions aimed at strengthening the retirement system. Recognizing the importance of 529 plans in planning for the future, the Act also helps 529 plan account owners, regardless of their income, by permitting tax-free and penalty tax-free rollovers of certain unused funds into a Roth IRA, subject to certain requirements and restrictions.²  As with any financial decision, you should consult with a professional tax advisor to understand how these provisions may apply to your personal circumstances, particularly since state and local tax treatment of 529s may vary from federal rules.

Always keep your overall financial well-being in mind. For example, avoid underfunding your retirement in favor of education. Seek good financial advice to determine the best funding ratios for you and your family, especially if you have multiple financial goals.

Additional Resource:

Morgan Stanley “Understanding 529 Plans”, https://www.morganstanley.com/content/dam/msdotcom/en/wealth-investmentsolutions/pdfs/529plan.pdf

Article Footnotes

¹ This assumes that there are no accelerated gifts made by the gift-giver to the same beneficiary during the year of the accelerated gift or the prior four years. Any accelerated gifts made in any of the four years prior to an accelerated gift is made may result in a taxable gift. Any gifts made during the year of the accelerated gift or the four years after may also result in a taxable gift. For more information, please see the applicable program disclosure document available at www.morganstanley.com/ADV.

² This material does not address the impact of state and local income taxes. The state and local income tax treatment of a 529 plan may differ from the federal tax treatment. You should consult with and rely on your own independent tax advisor.

The source of this article, 529 Plans and More: Innovative and Effective Ways to Pay for Education, was originally published on April 29, 2025.

 CRC# 4516546 05/2025