As tuition rises, it’s never too early to consider a tax-advantaged education plan
Texas Insider Report: AUSTIN, Texas – For many students, May marks the close of the school year — a time to celebrate hard work and successful steps toward life goals. It's also a smart time to plot the course ahead. As tuition rates rise at four-year universities, community colleges and trade schools, 529 savings plans offer tax-advantaged ways to navigate future expenses.
See How They Work
For many Texas families, May marks the end of the school year — and a year closer to what comes next. Whether it’s a four-year university, community college or trade school, tuition rates keep rising, and a Texas 529 plan is one way to help plan for these costs.
What is a 529 plan?
Named after Section 529 of the Internal Revenue Service Code, 529 plans are tax‑advantaged plans — authorized by the IRS and administered by states — designed to help families save for education expenses. Earnings grow tax-deferred, and withdrawals used for qualified education expenses are federal tax-free. Families can choose between prepaid tuition plans and college savings plans:
- In a prepaid tuition plan, families can pre-pay all or part of the costs of an in-state public college education.
- With a college savings plan, account holders select an investment option when opening the account, usually based on budget and investment risk tolerance. An age-based portfolio is commonly selected, with investments based on a child’s age and adjusted automatically as they approach college. However, account holders can withdraw funds for qualified education expenses at any time.
How 529 plans work in Texas
Texas has three 529 plans to choose from.
The Texas Tuition Promise Fund® is the state’s prepaid tuition plan. With this plan, families lock in today’s rates for undergraduate resident tuition and schoolwide required fees at two- and four-year Texas public colleges and universities, excluding medical and dental schools. The Transfer Value of the account can also be used at:
- Texas private colleges and universities
- Out-of-state colleges and universities
- Medical and dental schools
- Career schools
- Registered apprenticeship programs
Texas also has two college savings plan options.
The Texas College Savings Plan® is the state’s direct-sold college savings plan. In this plan, families can save for qualified education expenses at schools nationwide, including undergraduate and graduate tuition and fees, certain room and board expenses, books, and computer equipment.
The LoneStar 529 Plan® is similar to the Texas College Savings Plan, but families enroll in and maintain the account through their financial adviser.
Additional ways 529 plans can be used
While the original intent of 529 plans was directed specifically at higher education, federal legislation widened the scope. Under H.R. 1, passed by the 119th Congress and signed into law on July 4, 2025, a 529 plan may be used for:
- Expanded K-12 expenses and increased withdrawal limits: College savings plans can be used for additional K-12 expenses such as tuition, curriculum materials, books or other instructional materials, online educational materials, tutoring, dual enrollment courses, nationally standardized achievement tests and educational therapies for students with disabilities. Account holders may withdraw up to $20,000 per year per beneficiary for qualified expenses without federal tax penalties. Texas does not have a state income tax, but in states that do, tax consequences vary and could include the recapture of state tax deductions as well as penalties.
- Qualified post-secondary credentialing expenses: College savings plans can also be used for expenses related to enrollment or attendance of a beneficiary at a recognized postsecondary credential program. Expenses include tuition, fees, books, supplies and equipment required for or incurred in connection with a recognized postsecondary credential program, and fees for testing and continuing education if required to obtain or maintain the credential.
- Rollovers to an ABLE account: Funds in a college savings or prepaid tuition account may be rolled into a tax-advantaged ABLE account to save for qualified disability expenses for the beneficiary or a family member of the beneficiary, under specific conditions.
- Rollovers to a Roth IRA: The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 allows rollovers from a college savings or prepaid tuition account to a beneficiary’s Roth IRA account, subject to certain conditions.
A 529 account may be preferable to traditional savings accounts, certificates of deposit or taxable investments because earnings compound tax-deferred and qualified withdrawals are tax-free.
Over 18 years, a 529 college savings account could outearn a taxable account by 22% (Exhibit 1). However, because these are investment accounts, growth is not guaranteed and account holders may lose money, including the principal invested.
