When comparing 529 plans, you need to both look at performance and fees.

Two researchers at the University of Kansas School of Business have identified problems in how some states manage their 529 college savings plans. They suggest that these problems are caused by conflicts of interest, inadequate oversight, and a lack of investment sophistication by the state sponsors.

According to the College Savings Plan Network, a total of $508 billion is invested in 16.8 million 529 college savings plans as of June 30, 2024.

The result is that consumers who use 529 plans in certain states could be paying excess fees (as a result of these conflicts of interest), which lower their investment returns over time. If able to make a choice, consumers should opt for the lowest plan fees possible to maximize returns.

You can find your state's plan and see the fees in our 529 Plan Guide By State.

Characteristics of 529 Plan Fees

Justin Balthrop and Gjergji Cici of the University of Kansas analyzed 5,339 unique investment options across 86 state 529 college savings plans for their paper, Conflicting Incentives in the Management of 529 Plans. 

Two-thirds of the 529 plans are direct-sold and one-third are advisor-sold. Only 10% of the plans are managed in-house, with the rest outsourced to external program managers. A third have revenue-sharing agreements with the underlying mutual funds. 

About half of the total fees from 529 plans go to the state, the program managers, and various intermediaries.

The administrative asset-based fees for 529 plans are five times greater than the similar fees for managing a retirement plan.

The average 529 plan fees include the following:

• State Fees: 0.04%, but can be as high as 0.26%
• Program Manager Fees: 0.16%, but can be as high as 1.15%
• Distribution Fees: 0.23%, but can be as high as 1.10%
• Underlying Fund Fees: 0.38%, but can be as high as 1.29%

The overall expense ratio – the sum of all asset-based fees – averages 0.81% with a standard deviation of 0.53%. The expense ratio can be as high as 2.49%.

Given that the average return on investment for a 529 plan is about 6% based on historical performance data, some states and program managers are extracting a significant portion of investor returns for their own benefit.

In some cases, families would be better off saving in taxable accounts. 

States With The Highest 529 Plan Fees

According to the most recent Saving For College 529 Plan Fee Study, here are the states with the highest fees. This study looks at the 10-years costs of a $10,000 investment for direct-sold plans. It's important to note that advisor-sold plans can have much higher fees.

Comparing the most expensive plan option to the least expensive option, South Dakota College Access 529 charges over 10x the fees of the Lousiana START Savings Program.

The 10 most expensive 529 plans in the United States all charge almost 3x the of fees of the 10 least expensive plans in the United States.

Here are the 10 most expensive 529 plans in the United States (remember, each state can, and typically does, have multiple plan options):

You can compare the above states and plans with the options below. We're highlighting the HIGHEST cost option in the state. Louisiana does offer a plan with $0 costs, which is a fixed income plan managed directly by the state treasurer, but this plan is only open to in-state residents.

Tradeoff between State Revenue and Program Quality

Some states charge higher fees than other states, but this generally does not yield an improvement in program quality. In fact, quite the opposite. 

The 529 plans in states that extract more revenue from the 529 plans offer more limited investment options that charge higher fees and provide inferior net performance. The increase in the underlying fund fees is about a quarter of average mutual fund fees. 

The higher-cost 529 plans offer fewer investment options and are less likely to offer low-cost index funds. These states also do not provide additional or better state income tax breaks. 

The University of Kansas researchers found that investment options from plans where states extract the most revenue have an average underlying fund expense ratio of 0.506%, while investment options from states that extract the least revenue have an average underlying expense ratio of 0.219%. Thus, when a state extracts more revenue from the state’s 529 plan, the expense ratio is more than twice as high (2.3x higher). 

The University of Kansas researchers also used Sharpe Ratios calculated by Morningstar for all the 529 plans, showing that investors in these higher-cost 529 plans experience worse performance.

A Sharpe Ratio is a risk-adjusted return on investment. It is the 529 plan’s return on investment minus the risk-free rate of return and divided by the standard deviation of the excess return. A higher Sharpe Ratio is better.

The 529 plans from states that extract more revenue from the 529 plans have a lower Sharpe Ratio than 529 plans from states that extract less revenue, a sign that the investment plan performance, net of fees, is inferior. The Sharpe Ratios in the 529 plans in the high revenue-extraction states are 20% lower than the Sharpe Ratios in the states that extract the least revenue from the 529 plans.

Related: Best 529 Plans Based On Performance

Conflicts of Interest

Since 529 plans generate revenue for the states and program managers, there is potential for conflicts of interest.

Incentives for the state are not necessarily aligned with the best interests of plan participants.

States get higher fees in exchange for providing program managers with more flexibility to extract more revenue, directly and indirectly, from plan participants. 

529 plans often include investment options from the program manager’s own mutual funds and from investment firms with which the program manager has revenue-sharing agreements. 

529 plans with revenue-share agreements have underlying fund fees and total expense ratios that are 0.08% and 0.18% higher than other 529 plans.

Some examples the report highlighted were plans using excess fees to fund other state initiatives. Or there being a dis-incentive to negotiate better fees for investors since states enjoy the excess revenues. In the most egregious form, 529 plan fees may be used to fund advertising campaigns that some critics have called political campaigning, rather than investor education.

Lax Oversight

There is very little effective oversight over the management of 529 plans.

529 plans are exempt from the Investment Company Act of 1940 and Securities Act of 1933. They are not required to register with the Securities and Exchange Commission (SEC), so the SEC is not a source of investor protection. SEC rules concerning investment disclosure do not apply to the 529 plans. 

529 plans are not subject to a fiduciary standard. However, SEC regulations do require investment advisors, such as those that recommend advisor-sold 529 plans, to disclose conflicts of interest and consider costs when recommending products. The SEC’s Regulation Best Interest (Reg BI) is not quite a fiduciary standard, just a suitability standard. It  does not apply to the 529 plans themselves, just the investment advisors.

The states provide some oversight by appointing advisory boards. However, the politically-appointed advisory boards may lack the financial sophistication needed to align the 529 plan with the best interests of investors.

Program managers often provide more fee revenue to the states that have weaker oversight.

Inadequate disclosures make it harder for investors to make informed decisions. There aren’t any uniform disclosure practices that are standardized across all 529 plans. 

States that charge higher fees, which affects the net return on investment, do not provide better benefits for investors.

The states provide some oversight by appointing advisory boards. However, the politically-appointed advisory boards often lack the financial sophistication needed to align the 529 plan with the best interests of investors.

States that charge higher fees, which affects the net , do not provide better benefits for investors.  

Program managers often provide more fee revenue to the states that have weaker oversight.

Inadequate disclosures make it harder for investors to make informed decisions. There aren’t any uniform disclosure practices that are standardized across all 529 plans. 

Comparing 529 Plans: Tips for Investors

Minimizing costs is the key to maximizing net returns.

Higher fees are not associated with a better net performance after subtracting the fees from investment returns. The investment options do not necessarily provide better returns on investment. Even when they do, the increased returns are not enough to compensate for the higher fees.

So, investors should choose the state 529 plans with the lowest fees. 

There is often a tradeoff between low fees in an out-of-state 529 plan and state income tax breaks for contributions to the state’s own 529 plan. There is an inflection point between choosing low fees and state income tax breaks when the child enters high school. Keep the following in mind, if choosing a 529 plan in the future:

• When the child is young, the families should focus on 529 plans that have lower fees. 
• When the child enters high school, new contributions should be directed to that state’s 529 plan if the state offers a state income tax break on contributions to the state’s 529 plan. 

Low fees apply to the entire 529 plan balance, while the state income tax break applies only to each year’s new contributions. 

Morningstar.com and Savingforcollege.com provide ratings of 529 plans that consider the net return on investment after subtracting the fees. Savingforcollege.com also publishes a that evaluates the impact of the range of fees charges by each direct-sold 529 plan’s investment options. 

For a better understanding of contributing to a 529 plan in your state and what fees are involved, check out our complete 529 guide.

Did you know that your student loans could get you fired?

Imagine this: One day your boss pulls you into his office, sits you down, and says there is a problem. However, your work itself has been flawless. But he doesn't want to talk to you about work — he wants to talk to you about your credit report.

You see, when you were hired, you agreed to let your employer run your credit report (maybe unknowingly, simply signing a form in your hiring packet). And now, for whatever reason, your boss lets you know that HR has concerns about your debt. Suddenly, you go from star employee to looking for a job.

You already know that student loans suck. It's a fact of life. But did you know that your student loan debt can get you fired? It's happened, and here are eight reasons why, and what you can do to prevent it.

1. You're Distracted by Your Debt

This is a tough one because it's totally subjective. Your employer could have concerns that you're distracted and unproductive because of your student loan debt. Your employer could fear that your debt payments are not manageable, and that will put pressure on you while working.

If you're getting calls, emails, or even letters about your debt arriving at your workplace, this could put the nail in the coffin — beyond your student loans and credit score alone.

The bottom line is that you need to keep your student loan debt out of your workplace, or else you could be fired.

2. You're Viewed as Unreliable

The sad fact is, many people view large amounts of debt as a character flaw. Your boss may think, well, you can't handle your finances, so you probably can't handle a job. It doesn't matter that you took on this debt to go to school and better yourself.

Many employers check credit scores during the hiring process, and having a lot of debt (including student loan debt) could lead you to not getting the job.

But many companies have a lag time before this is discovered. For example, this woman was fired after six months of working because it took that long to discover her debt. Imagine working a new job for six months before getting fired for your student loan debt! That's awful.

3. Debt and Cash Handling Don't Mix

If you're in contact with cash or maybe the company's bank accounts, your employer might be concerned that shortage might occur and you might be the cause. Going back to #2 above, they might have concerns about your character, and think that you could use the company's money as an easy way out of your own student loan problems.

If you work in banking or financial services, it's very common practice for the institution to pull an employee's credit regularly — every six months or annually. If you flag as having a lot of student loan debt, or they have concerns about you making your minimum monthly payment, you will be flagged as high risk. And, in turn, you can be terminated for having that student loan debt.

4. You Must Maintain a Security Clearance

If you're going to have a job that requires a security clearance (and there were over one million public and private sector jobs that had a security clearance), you will be subject to a credit check. Having student loan debt shouldn't hurt you, but having any student loan debt in default could get you fired. The risk is that you could be vulnerable to being bribed by a foreign government in exchange for paying off your student loans.

Some contractors may even hire you, try to get you a clearance, and if you can't get cleared due to your loans, they fire you. If you're in the military, you may get demoted or reassigned.

But in most cases, they don't simply pull your clearance — they fire you too.

5. Your Employment Contract Says Your Must Maintain "Good" Credit

Many companies use employment contracts when hiring. Buried in the fine print on many of these contracts are phrases like, "The employee must maintain a good credit rating or higher . . . ." It's very vague, but it also gives employers reasonable cause to fire an employee if they have student loan debt.

It's important to note that simply having student loans isn't the issue — but having too much student loan debt can be. If your debt-to-income ratio is over 50%, your employer might be concerned, and depending on your contract, you could be terminated.

6. Workplace Rules Require You to Maintain "Good" Credit

If you work in a low-wage job, you may not have an employment contract — you will probably have some workplace rules or an employee handbook. This is equivalent to having an actual contract, and you are obliged to follow these rules, even if you didn't sign a specific contract stating you would — it's part of the terms of being employed.

In this case, if the workplace rules state that you must maintain good credit, you could also be terminated for having student loan debt and other credit problems.

Related: How To Get A Free Credit Report And Credit Score

7. You're Causing a Loss to Your Company

As crazy as it sounds, you can be fired for causing a loss to your company if you work in financial services. For example, if you work for a bank that issued your student loans, and you don't pay them back, you're causing your employer a loss — and you can be fired for it.

While not common, not paying your student loans back to your employer is the equivalent of stealing from them, and employers have fired employees for this very thing. And if getting fired wasn't bad enough, chances are that your employer will still come after you as a creditor.

8. You're Getting Your Wages Garnished

Finally, if you're getting your wages garnished due to your student loan debt, you can be fired as well. However, you can't be fired simply for having one wage garnishment — that's illegal. But if you have two or more garnishments, you can be fired.

So, if multiple student loan lenders are garnishing your wages, you could lose your job. Or, if you have one student loan lender, and another creditor garnishing your wages, you could also lose your job.

What the Law Says an Employer Can Do

On Requiring a Credit Check

Under the Fair Credit Reporting Act, an employer can require an employee to submit to a credit check. To conduct a credit check, the employer needs that employee's express written permission. However, most employers simply do this when hiring a new employee, and include an opt-out check box on the mass of employment forms they make you sign on your first day. However, it is perfectly legal to terminate an employee who does not submit to a credit check (in most places). It's similar to refusing to take a drug test.

You should know what's on this credit check. Track your credit for free at Credit Karma or pull your report annually at AnnualCreditReport.com.

On the Outcome of a Credit Check

This completely depends on your employment contract. If your employment contract states that your employment is contingent on maintaining good credit, your employer can fire you for your student loan debt.

However, if you don't have an employment contract (as in the case of many low-wage jobs), you need to see your employee handbook or workplace rules. Similar to an employment contract, if there are rules requiring you maintain good credit, you can be terminated.

Finally, if there are legitimately no rules in the workplace governing credit scores and credit reports, then the United States law applies. United States Code, Chapter 11 states that it is illegal for an employer to terminate an employee on solely the basis of bad credit or bankruptcy. This is the same code that governs bankruptcy law. But, it doesn't apply if an employment contract or workplace rule states otherwise — so, it still depends.

On Wage Garnishments

The Consumer Credit Protect Act states that an employer cannot terminate an employee due to one wage garnishment.

However, it is legal to terminate an employee due to more than one wage garnishment.

That means, if you have problems with student loan debt, and more than one creditor is coming after your wages, you could lose your job.

How to Know Where You Stand

The best defense against getting fired for having student loans is to know where you stand. This means checking your credit report regularly, and never missing a student loan payment. You should also check your credit before you start your job search.

If you want to check your credit report, there are a lot of free services like Credit Karma, that not only gives you your credit score, but also tells you what you need to do to improve. We love Credit Karma because it's free and they have a lot of great tools to help you improve your credit. They also have monitoring that can help you make sure that you maintain your credit score over time.

If you ever do get called into your employer's office to discuss your credit — don't accept getting fired. This isn't common, and in most cases your employer will work with you to help you improve your credit. Many larger corporations offer employee services that can help — like free financial planning. And even if you don't take advantage of it, simply telling your employer your plan to get out of debt, and offering to give them updates and check-ins, could help you save your job.

Have you ever been threatened with termination due to your student loan debt? Do you know anyone who has been fired because of their student loans?

A FERPA waiver, when signed by a student, allows parents to gain access to academic records during college. However, this raises an interesting question: should parents push their college-bound children to sign?

Many parents, accustomed to having access to their child’s academic records throughout high school, are surprised when they no longer have the same access once their child enters college. As a result, some parents may consider requesting – or even pressuring – their child to sign a FERPA waiver. Some parents even believe they have a right to the records if they are paying for college. But is this a good idea?

In this article, we’ll explore the nuances of FERPA, the implications of signing a waiver, and the potential consequences of forcing a college student to comply.

What Is FERPA?

FERPA, or the Family Educational Rights and Privacy Act, is a federal law that was passed in 1974 to protect the privacy of students’ educational records. Once a student turns 18 or attends a post-secondary institution, FERPA rights are transferred from the parent to the student. This legal shift means that parents can no longer automatically access their child’s educational records – including academic grades, financial aid information, and any disciplinary actions – without the student’s express written consent.

This change in access may feel abrupt to some parents, particularly those who have been heavily involved in their child’s academic life up until college. In high school, it’s common for parents to regularly check grades, discuss performance with teachers, and monitor other aspects of their child’s education.

When the student signs a FERPA waiver, it allows parents to regain access to these records during college. 

The Case For Signing A FERPA Waiver

From a parent’s perspective, there are many compelling reasons as to why a child should sign a FERPA waiver.

For one, it’s common for parents to continue financially supporting their college-aged child(ren), whether through tuition payments, housing costs, or general living expenses. In this case, signing a FERPA waiver may seem like a logical trade-off. After all, if they’re funding a student’s education, shouldn’t they be able to check in on their child’s academic performance to ensure their investment is paying off?

In addition to financial considerations, parents may also be concerned about their child’s overall well-being. College life can be demanding, and it’s not uncommon for students to struggle with the challenges of balancing academics, social life, and self-care. If a student is facing academic difficulties, mental health challenges, or other stressors, parents might feel that having access to educational records can help them intervene early and provide support when necessary.

Furthermore, parents who co-sign student loans or are deeply involved in the financial aid process may want to ensure that their child is meeting the necessary requirements for scholarships or grants. If a student falls below a certain GPA or fails to meet credit requirements, it could result in the loss of financial aid — a worse-case scenario for most families. Having access to financial records could, instead, help parents stay informed about any potential issues before they escalate.

The Case Against Signing A FERPA Waiver

On the flip side, students often have strong reasons for resisting the idea of signing a FERPA waiver. For many, college represents a key period of personal growth and independence. Managing their academic and personal lives without constant oversight is a key part of that journey. Forcing students to sign a FERPA waiver might feel like a sign that their parents don’t trust them to successfully manage their new responsibilities.

The pressure to meet certain academic expectations or to explain every decision to their parents can add unnecessary stress. College is a time when students are learning to balance responsibilities, manage time effectively, and cope with setbacks. Some students may worry that giving their parents access to their records could lead to additional pressure if they receive a poor grade, struggle in a difficult course, change majors, or simply take a non-traditional path.

There’s also the issue of privacy. A student might feel that some aspects of their college experience – including the classes they take, how they spend their time, or their academic setbacks – are personal matters to navigate on their own. This doesn’t necessarily reflect a lack of maturity or responsibility, but rather a desire to exercise their right to make independent decisions without the fear of parental judgment.

Should Parents Force The Issue?

So, should parents force their children to sign the FERPA waiver? The short answer is no. Compelling a college student to sign a FERPA waiver undermines the very autonomy that college is meant to foster. By pushing a child to sign such a document, parents run the risk of damaging trust and complicating the parent-child relationship during an already sensitive period of transition.

Instead of enforcing the waiver, parents may find it more productive to approach the conversation with a sense of mutual respect and understanding. Open communication here is key. Rather than making demands, parents can frame the discussion around their personal concerns – whether financial, academic, or related to well-being – and encourage their child to share their thoughts and feelings on the matter.

By building trust through regular, supportive communication, parents can foster a relationship where their child feels comfortable sharing important updates and asking for help when needed, without feeling micromanaged.

Consider Alternatives

It's important to note that signing a FERPA waiver doesn’t have to be an all-or-nothing decision. Some colleges allow students to grant partial access to records, such as financial aid information, while keeping academic grades private. This option offers a middle ground where students retain their sense of independence while giving parents access to critical financial data that might impact their ability to support their child’s education.

In families where finances are a primary concern, students may feel more comfortable allowing access to only financial records. Parents can remain informed about tuition payments, scholarships, and loan statuses without delving into academic performance unless a serious issue arises.

There are also other important forms that may be more relevant than FERPA, such as ensuring your college student has a health-care power of attorney in case you need to step in and make medical decisions for them in an emergency. Learn more about the forms and others at Mama Bear Legal Forms.

Teach Responsibility Through Independence

Part of the reason parents want access to academic records is to ensure their student is on track to graduate. But it’s important to remember that learning to manage academics and life independently is a key part of the college experience. Your student will be making decisions that affect their future, and while you want them to succeed, it’s important to give them space to grow, even if that means allowing them to make a few mistakes along the way.

Encouraging responsibility without demanding access to every detail of your student’s academic life can lead to a healthier parent-child relationship. And parents can still offer guidance, encouragement, and support without accessing private records. Trust your student to handle their academic progress, and let them know you’re there to help if they need it.

Final Thoughts

The decision of whether to sign a FERPA waiver is ultimately a personal one, and every family will approach it differently. For some, the waiver offers peace of mind and a way to stay involved in the financial side of their child’s college experience. For others, it can feel like an unnecessary intrusion into a student’s newfound independence.

The best approach? Start by having an open and honest conversation with your college student. Talk about your concerns, listen to their perspective, and see if there’s a compromise that works for both of you. Whether your child decides to sign the FERPA waiver or not, maintaining trust and open communication is the key to supporting your student during this pivotal time. 

More Stories:

Peak borrowing season for new student loans runs during the summer months, June, July and August. But predatory lending can be a problem for some student loan borrowers all throughout the year. 

What exactly is predatory lending? How can borrowers protect themselves from predatory loans? We'll answer those questions and more in this quick guide.

Definition Of Predatory Lending

The term “predatory lending” is not well defined. Many borrowers use it to refer to loans that have terms that they do not like. But the FDIC defines it as “imposing unfair and abusive loan terms on borrowers.” Typical examples include payday loans and auto title loans. 

Characteristics Of Predatory Loans

The FDIC identifies several characteristics of predatory lending, such as:

Some of these characteristics apply to student loans and some don't. For example, federal and private student loans don't have prepayment penalties, as a matter of law. But families borrowing to pay for college may encounter non-education loans that have these characteristics. 

Other characteristics of predatory loans include:

Federal and private student loans share some of these characteristics. So even legitimate loans aren’t perfect. Also, federal student loans aren't subject to the defense of infancy or statutes of limitation. 

Both federal and private student loans are made to traditional students. And some lack the financial sophistication to fully understand the consequences of borrowing to pay for college.

How To Protect Against Predatory Lending

Here are four steps you can take to safeguard yourself from unfair loan terms.

1. Consider Alternatives To Borrowing

Apply for grants and scholarships, which do not need to be repaid. Consider tuition installment plans, which spread out the college costs over less than a year and don’t charge interest. You may also want to get a part-time job to earn some money to pay college bills.

Borrow as little as you need, not as much as you can. The idea is to live like a student while you’re in school, so that you don’t have to live like a student after you graduate. 

2. Borrow Federal First

Federal student loans have low fixed interest rates and flexible repayment terms. They also offer a variety of benefits (some of which private loans can't match). These include federal deferments and forbearances, death and disability discharges, income-driven repayment and loan forgiveness options.

3. Check Your Credit Before Applying For Private Loans

You can check your credit reports for free at AnnualCreditReport.com. Errors can affect your ability to qualify for a loan and the interest rate you’ll pay if you do qualify. Correct any errors by disputing them. 

Do so at least 30 days before you apply for a private student loan as it can take a month for errors to be removed from your credit reports.

4. Shop Around When Looking For A Loan

Most borrowers focus on finding the lowest-cost loan. And that's a great starting point. But other terms that may be of interest include the quality of customer service (e.g., does the lender offer evening and weekend call center hours) and the availability of loan discounts (e.g., autopay discounts, good grades discounts, graduation discounts).

When comparing student loans, borrowers should consider both the monthly loan payments and the total payments over the term of the loan. A lower monthly loan payment may involve paying a lot more over the life of the loan.

A loan’s APR combines the impact of the interest rate, loan fees and repayment term. A higher APR is a more expensive loan. Borrowers should be more careful when a loan’s APR is in the double digits. For example, a 16% interest rate on a 10-year repayment term means that the borrower will pay more in interest than the amount borrowed. For a 20-year term, an interest rate of 8% or more means paying back more than double the amount borrowed.

Another bad sign is when a loan requires more than a 10-year repayment term for the monthly loan payments to be affordable. That’s generally a sign that you borrowed too much or that the loan is too expensive.

Final Thoughts

Ultimately, the best way to protect yourself against predatory lending is to become financially literate. This will help you understand how interest rates, fees and loans work so that you can make smarter borrowing decisions.

Be sure to read The College Investor's student loan guide. Your school may also offer free courses on how to pay for your education in a financially responsible way. Finally, you can find a wealth of financial tools such as calculators, budget worksheets, and planning checklists on MyMoney.gov.

One of the biggest fears families have about using a 529 plan to save for college is the dreaded 529 plan penalty.

There are many ways to save and pay for college, and the absolute best way to do it varies depending on your specific situation. A 529 plan, which is designed to help you with higher education expenses, is a type of tax-advantaged account that allows you to save and invest money.

As long as you withdraw that money for qualified expenses, you can do so without paying taxes on it. However, if you don't use the funds in your 529 plan for qualified education expenses, you may be assessed a tax penalty.

Thankfully, it's fairly straightforward to avoid this 529 plan penalty, as long as you take a few precautionary steps.

What Is a 529 Plan?

529 plans are a type of account that is typically used for saving for college and other higher educational expenses. 529 plans are run by individual states. You can open a 529 plan in a variety of states, not necessarily the one you currently live in. 

However, many states give tax deductions or tax credits for contributing to their specific 529 plan. So one of our best 529 tips is to consider opening your plan in the state you live in (or pay taxes in) to take advantage of these tax benefits, if you're eligible.

It's relatively easy to set up a 529 plan, and you can set them up for a beneficiary (i.e. children). While each 529 account has a specific beneficiary, you are able to change the beneficiary at any time. 

This can be useful if one of your children earns a full-ride scholarship or decides not to attend college. The funds in their account don't have to go to waste—instead, you can use that money for a different beneficiary (i.e. a different child or person). 

Also, you don't have to be a parent to open a 529 plan for someone. Grandparents, aunts, uncles and others can open a 529 plan.

Eligible 529 Plan Expenses

One of the key parts of how 529 plans work is that you must use them to pay for qualified education expenses. However, it's more than just college tuition that is eligible—there are a number of qualified 529 plan expenses. 

Here are some:

Make sure that you check your state's 529 plan rules! Some states don't allow you to use a 529 plan for K-12 education or student loan repayment.

Details Of A 529 Plan Penalty

If you use money in a 529 plan for something other than a qualified educational expense, you will likely incur a 529 plan penalty.

The 529 plan penalty is 10% on the earnings portion withdrawn for a non-qualifying expense. 

You will also have to pay ordinary income taxes on the earnings portion of the non-qualifying withdrawal. 

Finally, you might face state taxes as well. Some states will recapture any tax deduction received on the contributions, while others (like California) will assess a flat penalty tax.

Remember, all 529 plan distributions are allocated between the earnings and contribution (basis) portions. Since your contribution was after tax, you only face the taxes and penalties on the earnings/gains. However, you could face state recapture issues on deductions or tax credits received.

Consult with your tax preparer to make sure that you are correctly accounting for any fees or penalties that you owe.

It's important to remember that penalties and taxes lower the value of your 529 plan, so you should avoid incurring it if at all possible.

How To Avoid The 529 Plan Penalty

While a 529 plan penalty of 10% on top of any state penalties and additional tax owed can be a large amount, the good news is that it's fairly easy to avoid these fees. The best thing to do is to make sure that you keep good records of your withdrawals. You'll also want to make sure that you stay within the 529 plan contribution limits. 

If the beneficiary of your 529 plan (often your child) does not go to college or doesn't use up the money, you have options other than just closing the account and paying the penalty. Here are a few considerations: 

• Change the beneficiary, to another child or even yourself.
• Use the money to help pay for higher education expenses for a grandchild or other family member.
• Let the money stay in the account, and transfer account ownership to your child in the future (so they can use the money for their future family)
• Change the beneficiary to yourself or a child and rollover the excess 529 plan funds into a Roth IRA

Basically, you have the potential to setup a 529 plan as a long-living educational trust for your family. If you don't need the money, you can let it grow for the future!

Other (Less Common) Options

There are some other ways to avoid the 529 plan penalty, but they are less common. However, it's important to remember that in these scenarios, the earnings portion of the distribution is still subject to income tax. 

The 10% 529 plan penalty may be waived if:

• The beneficiary dies or becomes disabled
• The beneficiary receives a tax-free scholarship
• The beneficiary receives educational assistance through a qualifying employer program
• The beneficiary attends a U.S. Service Academy (Army, Navy, Air Force, Coast Guard, Merchant Marine)
• You return the over-withdrawal or unused funds in a qualified period of time

Stay Within The Qualified Expenses To Avoid Penalties

529 plans are one of the best ways to save for college and other higher education expenses. Your money can grow tax-free and you may even get a deduction or credit on your state income taxes. 

As long as you use the money in your 529 plan for qualified education expenses, you won't have to pay income tax on your contributions or the growth in your account.

But if you withdraw money from your 529 plan for non-qualified expenses, you will pay a 529 plan penalty. This penalty is 10% of the withdrawn amount, and the money will also be treated as ordinary income, meaning you'll have to pay income taxes on it as well. 

Some states may also charge an additional penalty on non-qualified withdrawals. 

Want to learn more about 529s? See our Ultimate Guide.